Tech Mahindra announced the acquisition of Lightbridge Communications Corporation (LCC) (unlisted) for an enterprise value of $240 million. LCC is the largest third-party provider in the global network services space and will have revenues of $430 million in CY14F at an EBITDA margin slightly north of 8%.
The acquisition implies EV/Sales of 0.55x and EV/EBITDA of 7x based on CY14 numbers. Tech Mahindra has indicated that it will increase the margin profile of the company although in the first year it expects the acquisition to be EPS dilutive.
LCC is being acquired at an enterprise value of $240 million, which includes $85 million in debt. The company indicated that the net cash outflow for the acquisition will be $200-220 million implying that $45-65 million of Tech Mahindra will fund the acquisition through a combination of internal accrual and some debt financing. The acquisition implies EV/Sales of 0.55x, EV/EBITDA of 7x and P/E of 9x (assuming 4% net profit margin) based on CY14F numbers that management provided.
We view the acquisition positively, although we believe the synergy benefits, especially on the cost side, will be gradual. Based on our pro-forma analysis, where we assume 5% revenue CAGR in the LCC business over FY15-17F and adjusted EBITDA margin improvement from 8% in FY15F to 14% in FY17F, there could be R100 upside to our target of R2760. We maintain a ‘buy’ rating.
Nomura