You may have seen the Backchannel reports and/or the analysis that we have done on the data itself. For all the talk of consolidation within telecoms, there is clear evidence of there remaining a highly fragmentated second tier to the market.
It will therefore come of little surprise to find that the market for calls and access is equally fragmented. In total, Ofcom's data shows that OLOs between them generate around £1.1bn a year in revenues, in the second tier of which there are around 75 companies between them generating around £550m of turnover*. Yet these companies are failing to make a profit: losing on aggregate £6m per year.
*Data from individual accounts filed at Companies House. Beware of comparing turnover with Ofcom's view because of wholesale and double counting.
There is a belief that there are around 600 CPS providers in the UK. We have been able to identify 535 of these and looked into their parentage. The summary of the calls and access market is roughly:
- There are around 535 legal entities providing Telecoms services that include a CPS product
- Of these, 330 are subsidiaries of larger “household names”
- Of the remaining 205, around 80 are primarily hardware and/or systems integrators, 55 provide calling card services only and 45 are primarily VoIP technology companies
- There are around 75 independent CPS/WLR providers turning over £100k - £10m per year
- The total turnover of these 75 companies is around £550m per year
- Every company believes they have the best wholesale buy rates
At Net Profit/Loss level, these 75 companies between lose £6m a year
While many customers are loyal, recent developments in price packaging by larger players have led to greater churn in both the consumer and business markets. These small cap companies are facing a key strategic crossroads with the following options.
Option 1:
Manage for cash and extract shareholder value by increasing dividends
Option 2:
Acquire to increase buying power and GP margins. Increase valuation for exit at later date
Option 3:
Sell the customer base or the equity of the business now while it still has a reasonable value
Companies in this space are typically valued for their customer bases on the basis of their monhtly recurring gross profit. Non-recurring revenues have little value at this end of the market. Potential acquirers are paying anywhere from 18 to 24 times this GP figure, with the higher values being paid in paper and a 20% discount in the event of a cash lump sum. Part cash / part earn-out based schemes that allow the acquirer to short-cut due dillegence process are by far the most common.
The barrier to consolidation is the turnover to acquistion cost ratio. There are companies in the £1.5m annual turnover bracket that have paid six figure investment banking fees in order to attract buyers...
# posted by Jeremy Penston @ 9/26/2006 04:45:00 PM
