Gamma is acquiring around 80% of HFO Holding AG (HFO), one of the leading SIP Trunk providers in Germany, for an initial consideration of €20.4m in cash with an option to purchase the remaining shares over the next three years. In line with its stated strategy, Gamma can invest and use its commercial strength and expertise to accelerate HFO’s growth and replicate the Group’s success in the UK by developing a market leading position in Germany. Noting net debt of €2.9m when the deal closed, the implied historical EV/EBITDA multiple of about 10x compares with Gamma’s equivalent of 18.7x. We estimate that the deal will be 4% earnings enhancing in the first full year of ownership and our estimate upgrades reflect that. The European markets for cloud telephony in which Gamma is now represented will ultimately overtake the UK in size, providing Gamma with significant future growth potential. We view this acquisition as another significant step in Gamma’s strategic aim to expand into Europe via exposure to another lucrative market opportunity.
The acquisition gives Gamma the opportunity to work with HFO’s management and use its experience of developing and selling a market leading cloud PBX solution via the channel in the UK to accelerate HFO’s growth in the emerging Cloud PBX market in Germany.
This acquisition is the third which Gamma has completed so far in 2020. Since it evolved its strategy to include expansion into Europe, the Group has now made five acquisitions which have established its presence in the Netherlands, Spain and now Germany.
Together, the Cloud PBX markets in Spain, Netherlands and Germany represent an opportunity more than three times the size of that of the UK. Importantly, those markets have much lower conversion rates from legacy PBX to Cloud based products, representing ideal markets for Gamma.
We are increasing revenue estimates by 12% and 13% in FY 21E and FY 22E respectively. Our Adjusted EBITDA estimates increase by just under 4% for each of those years. Our current year (FY 20E) estimates increase by proportionate amounts for the initial half year of ownership.
HFO recently started to sell Cloud PBX offerings through its extensive network of channel partners and is also is the largest B2B mobile distributor in Germany. Consistent with its long term strategy, this sizeable acquisition gives Gamma a presence in Germany with which it can grow its share of what is set to be a significant market.