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M&A masterclass confirmed for DISTREE EMEA

by Stuart Wilson, Wednesday 24 January 2018

Pradip Somaia, partner at Regent
Pradip Somaia, partner at Regent

Next month’s DISTREE EMEA regional consumer tech channel event will include a workshop hosted by Regent Partners focused on merger and acquisition (M&A) trends in the technology, media and telecommunications (TMT) space. The regional distribution channel has been shaped for decades by consolidation forces with the old channel adage of ‘get big, get niche or get out’ still relevant today. Channel EMEA caught up with Pradip Somaia, partner at Regent, to get the lowdown on the latest M&A trends.

Channel EMEA (CE): What are the current trends within the European TMT space?

Pradip Somaia (PS): European TMT merger and acquisition (M&A) activity increased by 3.8% in terms of the total number of deals announced. There were 3,658 deals announced in 2017, which is a new record high, compared with 3,524 in 2016. However, the total value of deals fell 16% from US$271 billion in 2016 to US$228 billion in 2017. The number of European TMT companies making an IPO was erratic during the year, but overall there was an increase in IPOs to 97 in 2017, up from 61 in 2016.

CE: What specific trends are you seeing within the ICT channel space?

PS: The ICT channel is increasingly adapting to the growing demand from consumers for new technology. This started with the move from desktop to laptop computers, progressed further with the move from basic mobile phones to smart phones and the introduction of tablets. The latest trend has been the surge in consumer demand for wearable technology in the form of smart watches and health monitors.

While these new and evolving markets create huge opportunities, they are not without risk. A sudden change in fashion is one of the pitfalls that can beset distributors who need to be able to provide the latest technology but run the risk of losing a significant revenue stream and potentially being left with unwanted stock if a new product range emerges or a manufacturer withdraws from a market or is acquired.

CE: What type of channel companies are in demand as acquisition targets?

PS: The emergence of new technologies emphasises the need for value-added services and technology skills in the channel to enable the distributors to help the manufactures enter the market, and to help the retailers or resellers to maximise the sales potential. The demand for value-added services and new product lines is therefore becoming an important driver in M&A in the channel to increase the economies of scale, improve profit margins and rapidly build expertise.

CE: What are you seeing in terms of valuations?

PS: The valuation of any business depends on many factors but the primary one is usually the underlying profit of the business. In particular the earnings before interest, tax, depreciation and amortisation (EBITDA) is a frequently used measure. Most businesses are valued in the region of 5 to 8 times EBITDA although the spread can be wider.

The actual multiple within this range depends on other factors such as size, growth and reputation or brand awareness. A secondary valuation measure is the multiple of price to sales (PS) which can act as a guide to what would be a reasonable earnings multiple. For example, a 5% EBITDA margin implies a PS in the range of 0.25 to 0.4 which is typical of a low margin distributor.

However, for EBITDA margins of 20%, the implied PS range would be in the region of 1 to 1.6 which is more typical of value added resellers or system integrators. Selective M&A provides a means to increase the underlying profitability and also improve the profit margin by acquiring scale and higher margin business such as value-added services.

www.regent.com

DISTREE EMEA 2018

Regent Partners, founded 30 years ago, specialises in TMT M&A and has completed many deals in this space. The company will present its latest views and analysis on M&A deals during a workshop at DISTREE EMEA 2018, which takes place on February 6-9th in Monaco. Confirmed channel delegates can register for the workshop or request a one-on-one meetings with Pradip Somaia from Regent through their personal event web account.

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