What would the acquisition do to $ABB's balance sheet?
My final post on the $SYM deal for the weekend, is to take a quick look at the impact of the deal on the $ABB balance sheet.
At YE FY23 ABB had net debt of $128.95m
The cash component in the acquisition is $202m. (Smaller than OTW which was $280m cash component I recall)
Note $SYM has no debt and assuming the cash on hand goes to paying out the special dividend to monetise the franking credits means that post-acquisition, $ABB will have net debt in the region of $330m.
Assuming organic FCF in FY24 for $ABB of $50-70m and $15m from $SYM, that adds back c. $75m which can come off the debt.
With a proforma EBITDA of the combined company of ($108+$33)m = $141m, that's a Net Debt / EBITDA(proforma forecast) of c. 2.3 pre-FCF-FY24, falling to c. 1.8 at EOFY24 assuming FCF is delivered as assumed.
Net interest would increase from $9m for $ABB in FY23 to c. $23m for the combined company (assuming a cost of debt of 7% and a $330m debt for a full year.)
These are just some rough scoping/ballpark numbers. (Apologies if the analysis offends any StrawAccountants!)
This all looks very reasonable.
For those that missed it, Aussie have made a nonbinding indicative proposal to acquire Symbio. Symbio shareholders would receive $2.36 in cash and 0.192 Aussie Broadband shares for each share held (75% Cash and 25% scrip structure). There is obviously a possible bidding war commencing here with Superloop also interested, but one would have thought Aussie have a much better ability to offer cash as part of the deal, making them attractive from Symbio's point of view.
Not dissimilar to Over The Wire when Aussie first made an offer, I am not particularly familiar with Symbio, so I have started a deep dive this evening. I am curious what other members think -- is Symbio a similar proposition (like OTW) for Aussie? I see that they have a footprint in Asia (Singapore, Malaysia, Taiwan etc).
At a high level, Symbio has three core segments:
- Communications platform as a service - enables large telecoms and software companies to orchestrate cloud communication services in Asia Pacific
- Telecommunications as a service - enables Australian consumer brand, telco or ICT providers to sell their own telecom services
- Unified communications as a service - enterprise-grade cloud calling services in Australia, New Zealand and Singapore. Partners in this segment include Webex, Microsoft Teams, Twilio and AARNet
Is this acquisition primarily around strengthening value add for their enterprise and government customers? I will report back with my own thoughts when I am better versed.
@Rocket6 like you I'm not at all familiar with $SYM other than knowing it is one of the early Aussie movers in using software to disrupt the telco space by delivering VOIP.
It started life as MyNetFone (MNF), and was founded in around 2002 by telco veterans Rene Sugo and Andy Fung. IPO was in 2007.
Sugo is still CEO and holds 7.99% of shares, with Fung holding 13.54% and is still on the Board as a non-Exec in the influential position of chair of the Nominations Committee. So it definitely ticks the box of a founder-led business
In this post, I've put together four quick charts of the numbers, with the conclusion that $SYM having started well, has NOT succeeded in delivering a high quality business. In fact, its pretty poor quality and getting worse. I stick to the hard numbers in this post, and will come back separately with some thoughts on your question, why is $ABB doing this?
That's a really important question, because it gets to the very heart of my thesis about $ABB.
(Sources: I've pulled charts 1-3 from Morningstar Quant. Report, checked 2023 with Marketscreener.com and Annual report, and downloaded the share prices from Yahoo Finance)
Chart 1: Revenue and Operating Margin
From its founding in 2002 revenues grew strongly, however the last 6 years, $SYM has struggled to grow as competitive intensity in the internet communications space has increased with mutiple telcos, VOIP specialists, and platform players competing to serve business and government customers.
The impact of competition can be seen in the declining %OM, and the rate of decline has accelerated as $SYM has focused on its expansion into APAC where there are large addressible markets, establish broadband and cloud infrastructure, and lower competitive intensity in the telco space,.... but this too is changing.
Most recently, in part to stem the decline in profitability, $SYM has dialed back on its APAC expansion plans, and said it will focus on getting to profitability in the existing countries.
Chart 2: Cash Flows
Despites it flattening revenue growth (and implied maturity), $SYM has been unable to drive growth in FCF, given the continuing need to invest in its tech platform and international expansion. With integrations to nearly all major global communications brands (Aircall, Microsoft, Cisco, Google, Twillo, Ring Central, Zoom etc.) and providing service to over 100 countries, this requires an ongoing investment program in its tech stack. Capitalised software development costs in 2023 were $16.3m up from $10.6m in 2022, as an indication of the ongoing technology investment.
Chart 3: EPS, DPS and ROE
Despite flattening revenue growth, until this year $SYM had slowly ground higher on EPS and maintained a modest dividend.
However, in 2023 with revenue essentially flat, increasing staff costs, technology costs, partner costs, and costs of APAC expansions overwhelmed the thin margins, leading to the worst earnings result in more than 9 years.
ROE summarises the overall story. Have grown ROE in in its first 10-12 years of operation, the last 9 years has seen progressively declining ROE. Its an ugly picture.
$SYM is a company ripe for takeover!
Chart 4: Share Price
The final chart should be no surprise.
From its IPO in 2007, $SYM's SP grew strongly through 2017 driven by revenue growth and eventually earnings growth, SP was sustained through 2020 in the zero interest rate environment and even boomed with other tech as part of the ZOOM and WFH thematic during the pandemic.
However, in the rising interest rate environment, and with recent struggles across all financial and operational metrics, the SP has come tumbling to earth, reaching a low of $1.45 at the end of 2022 given the outlook for a poor FY23 result.
2023 has seen some improvement in the SP with management dialling back the APAC expansion with a commitment to greater focus on profitability.
Of course, the takeover offer by $SLC and Friday's stronger bid by $ABB has put a rocket under the SP again.
Given, the overall story of $SYM over the last nine years, I don't think there is any question that the current holders will be happy to offload this business. It hasn't proven to have competitive advatanges in a highly competitive industry.
On Friday's closing SP of $2,64, $SYM is trading on an EV/EBITDA multiple of 5.7x, although this will kick up to around 6.5x on Monday. This compares with 6.8x for $SLC and 9.9x for $ABB.
Disc: I hold $ABB only in RL and SM
Why is $ABB seeking to buy $SYM?
$ABB has cracked the code for competing in the Australian resi market. If is continues to focus on customer service, maintains its tech stack to manage service performance and network efficiency, it should continue to succeed grinding away taking share from the incumbents at attactive margins. It doesn't need an acquistion to succeed there.
So this is all about the business, E&G and Wholesale markets.
Over The Wire was step one in getting a jump start on those markets. $SYM appears to be step 2. Why?
I think the answer lies in the 500 partnerships and integrations into virtually every major internet-based communications solutions provider from Cisco to Zoom, and Microsoft to Google. Presumably this will strengthen $ABB tech stack and also provide them with a comprehensive and compelling set of services for data, voice and video to offer to existing and new customers.
A clue perhaps lies in the $ABB FY23 result. While growth in Wholesale segement was strong, growth in Business and E&G is coming off a much smaller base and was very modest (less than 10% revenue growth in each.)
$SYM gives both greater starting scale in these segements, as well as a broader product suit, software development capability and customer support capacity.
For me, the fly in the oinment are the international businesses. Today, that does not fit with the $ABB strategy (or my thesis) at all and it raises several questions.
Will $ABB continue with the international businesses, or will it exit? These businesses are neither currently profitable nor do they fit with the Aussie strategy. $ABB could capture significant cost savings by rapidly exiting or on-selling the international businesses.
The attraction for $SYM of the international businesses is the addressible market and the higher recurring revenue per number. The chart below is taken from the FY23 $SYM presentation, and it underscores the impact of the higher competitive intensity in Australia.
My Takeaway So Far
I see the logic in $ABB acquiring the Australian part of $SYM. It looks like - in absence of a return offer from $SLC - that it can pick this up at a reasonable multiple. It steps up its capability in the B,E,G&W segments, as this will shape up to be a big fight with $TLS and TPG.
$ABB needs to explain to investors where the international bit fits. That's very unclear to me, and my preference would be for them to focus on Australia. But I am interested to hear what Phil has to say.