Portfolio Updates

Redcentric buys Piksel – the first step in its consolidation strategy


Redcentric, which provides IT managed services to UK businesses, has announced a c.£9.5m acquisition of Piksel Industry Solutions, a provider of application, public cloud and security-based digital transformation and managed services. The consideration was funded from existing financial resources.

Kestrel Insight

This is an exciting acquisition:

  • It expands Redcentric’s offering in public cloud and security. Piksel has many years experience in migrating customers to Amazon Web Services and Microsoft Azure, so this will enable Redcentric to support its customers in evaluating the best fit for their applications and how to successfully complete the recommended migration.
  • Redcentric and Piksel can cross-sell established security, networking and collaboration products. This expanded service offering will be an important driver of future organic growth rates.
  • Annualised cost savings are estimated to exceed £1m. Both companies are located in Yorkshire, with satellite offices in London. These savings will take the run-rate profitability of Piksel to £1.5m, suggesting an acquisition multiple of 6.3x. More ambitious cost synergies, together with expected revenue synergies, would substantially reduce this acquisition multiple.

Delivering on strategy

This is the first step by the management team in its long-promised strategy to use Redcentric’s under-utilised balance sheet to become an industry consolidator. If delivered successfully this should have a material impact on growth rates. Broker forecasts for year-end cash balance is £11.3m. If we add a modest debt capacity of 2.0x EBITDA, Redcentric will have c.£60m of funding capacity for M&A.

EBITDA Uplift

If we assume a conservative post-synergy acquisition multiple of 8.0x, this funding capacity could buy c.£7.5m of EBITDA – a c.30% uplift on current EBITDA of £24m for no equity dilution. Factoring in Redcentric’s expected annual free cash generation of £15m, and less conservative M&A assumptions, this uplift could rise to well over 40%.

Confidence in management team

We are cautious about the dangers of M&A for the sake of financial engineering and recognise that without proper integration, roll-up strategies invariably come unstuck. However, the Redcentric management team has demonstrated its ability to integrate acquisitions made by the previous management team and drive out the all-important synergies that are critical to deliver shareholder value. We’re confident that Redcentric can repeat this successful formula.

 

Kestrel’s Portfolio Updates should neither be construed as investment research, nor the provision of investment advice, nor a recommendation. This article should be viewed as short term commentary only based on the latest economic statistics, company results or information on upcoming releases or events. It is only a brief unsubstantiated summary of Kestrel’s opinion on such information as at the date of publication and no reliance may be placed upon any contents of this article by the recipient.


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