Acquisition of Sungard data centres and 4DSource: RNS
This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.
Acquisition of Sungard data centres and 4D accelerates Redcentric's growth strategy through both scale and capability
Further to the announcement made on 7 July 2022, Redcentric plc (AIM: RCN) ("Redcentric" or the "Company"), a leading UK IT managed services provider, is pleased to provide further details in respect of the acquisition of certain business and assets relating to 3 data centres ("DCs") from Sungard Availability Services (UK) Limited (in administration) ("Sungard") and the separate acquisition of the entire share capital of 4D Data Centres Ltd ("4D").
Rationale for the acquisitions
In the last annual report, we outlined our strategy to grow the Redcentric business by adding both capability and scale through M&A. Following the acquisitions of Piksel Industry Solutions Limited, 7 Elements Limited and Sungard's consulting business, the acquisitions of 4D and Sungard DCs also bring additional scale to the Company.
Sungard's DC business is renowned for its highly resilient data centre estate and its assured IT recovery services. The business hosts and manages the mission critical infrastructure for a strong blue-chip enterprise customer base that provides an excellent addition to the Company's existing client base. The recovery services offered by Sungard DCs represent additional capability within Redcentric's customer offering and will therefore give Redcentric exposure to new areas of the market.
4D is a successful hosting business operating out of 2 data centres within the UK, with a focus on colocation services.
Redcentric's product and solutions portfolio is much wider than both Sungard's and 4D's offerings, meaning these acquisitions will provide significant cross-sell opportunities into these newly acquired customer bases.
Deal structure, consideration and financials
The transaction was structured as a business and asset purchase. Under the terms of the asset purchase agreement ("APA"), Redcentric was committed to paying a minimum of £11.0m, conditional on certain contracted revenue thresholds being met. However, as the minimum thresholds were not met, Redcentric exercised its right to proceed with the acquisition at a reduced price of £10.12m. The initial consideration has been satisfied in cash using the recently signed £80m revolving credit facility.
During the period between exchange of the APA and completion of the acquisition, 162 Sungard DC customers (60.4% of the historical revenue base) signed long term contracts with the Company, ranging from twelve months to sixty months and generating total annual recurring revenue of £34.9m. A further 57 Sungard DC customers (30.4% of the historic revenue base) signed short term contracts, ranging from one month to nine months, which will add revenue of £4.2m, giving an anticipated total contracted first 12 months' revenue of £39.1m. The Sungard DC customers that signed short term contracts are a mix of customers who are in the process of leaving Sungard and those who were unable to achieve authorisation for a long-term commitment within the short timescales between exchange and completion.
Pursuant to the terms of the APA, the initial maximum consideration payable for the Sungard DC business was £22m. This was dependent on the value of the contracts that renewed with Redcentric between exchange and completion. Under the terms of the APA, should any of the customers who have initially signed short term contracts agree to sign long term contracts within 12 months of the date of completion of the acquisition then this could trigger, dependent on the value of annual recurring revenue, additional initial consideration of up to £11.4m.
In addition, pursuant to certain performance criteria, which expire twelve months following completion, there is up to a further £7.625m in cash that may become payable, although, at this stage, the board of directors of the Company believes that it is unlikely that the required criteria will be met.
Given the nature of the transaction, only two balance sheet items were transferred as part of the APA, being tangible fixed assets and a holiday pay accrual. On completion, fixed assets with a net book value of £17.2m were transferred. The holiday pay accrual is yet to be quantified and the net assets transferred will be subject to an impairment review. Redcentric will occupy the 3 DCs initially under licence, but we expect to conclude negotiations with the landlords shortly and we estimate that we will take on IFRS16 finance lease liabilities of £27.4m with a weighted average lease life of 6.4 years.
The former Sungard DC business was loss making but based on the value of the revenue from the Sungard DC customers that have entered into new contracts with the Company, and the planned restructuring of the cost base acquired as part of the transaction, it is expected that the Sungard DC business acquired will be in a profitable position within six months of ownership and we expect to achieve long term EBITDA margins from this acquisition of 25% by the end of the year ended 31 March 2024.
Electricity prices are the largest cost to the Sungard DC business and present the most significant risk to profitability given current volatility. In line with our ESG policy, we will look to implement a series of energy efficiency measures during the first year of ownership that we estimate will cost up to £1.5m in one off capital expenditure. Normalised capital expenditure of £1m per annum is anticipated.
On 27 June 2022 Redcentric acquired the entire issued share capital of 4D for a consideration net of cash and debt like items of £10.0m. At the date of acquisition, the business had run rate revenue and run rate IFRS16 adjusted EBITDA of £6.6m and £1.4m respectively. £1.6m of net assets were acquired, including £1.2m of IFRS16 liabilities with a weighted lease life of 3.3 years. Synergies of circa £0.5m are anticipated, to be realised within the first twelve months.
The consideration has been satisfied in cash and was also funded out of the recently signed £80m revolving credit facility.
Peter Brotherton, CEO of Redcentric commented:
"With these 2 acquisitions, we have now completed 5 acquisitions in the last 9 months and totally transformed the Company. We have added over 600 customers to our base and increased run rate revenues by circa 60%.
The acquisition of Piksel has broadened our product offerings by adding full hyper-scale capability; the 7 Elements and Sungard consultancy acquisitions have significantly strengthened our security product portfolio; and the Sungard DCs acquisition has added new recovery-based services. We believe that we now have the most comprehensive IT and Telecommunications product and solutions offering in the market.
During the next 6 to 9 months our focus will switch to fully integrating the acquired businesses and exploiting the meaningful cross-sell opportunities that these acquisitions bring to Redcentric.
We look forward to making the most of the very significant opportunities that come with these acquisitions and to an exciting future"
Peter Brotherton, Chief Executive Officer
David Senior, Chief Financial Officer
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