When it comes to M&A, a few takeovers stand-out. For instance Google’s $50m acquisition of the Android mobile operating system in 2005, as well as eBay’s 30x return on its purchase of Paypal in 2002. Although not quite so grand, we think Matchtech’s £66.3m acquisition (including £8.4m of debt) of Networkers International on 2nd April 2015 could also prove transformational - perhaps even generating north of 180p/share in shareholder value.
Indeed the early signs are positive. In today’s pre-close trading update for the y/e 31st July 2015, total NFI for the enlarged entity jumped +42% in H2 to £32.5m and +22% to £55.0m for FY15. Moreover, apart from ‘revving’ up the top line, we estimate that once Networkers is fully integrated, at least £2m pa of annualised cost synergies could be generated by FY17. Driven via the elimination of duplicate overhead and Plc resource, together with the rationalisation of back office functions – costing only £2m in exceptionals (split £1m in both FY15 and FY16), equivalent to a 16 month payback.
However, the real beauty of the deal lies elsewhere - that is by leveraging Networkers’ overseas infrastructure to support MTEC’s existing clients in foreign jurisdictions along with cross-selling into adjacent verticals (eg Telecoms). With this in mind, integration of the 2 sales teams is being accelerated – meaning that on 1 August, the IT and engineering verticals were each merged under their own unified management groups
Although difficult to quantify exactly, we believe this sharper organisational structure could deliver sales synergies of >£4m p.a. in due course – none of which has been factored within our forecasts.
In the meantime the business is ticking along nicely, with this morning’s statement saying that FY15 trading had been “steady”, delivering adjusted PBTA “in line” with consensus. Although LFL NFI growth of 1% was impacted by the closure of the Barclay Meade office (28 heads) in London and lagged the wider recruitment market, overall profits have nonetheless kept on track with expectations thanks to tight cost control.
Here the recruitment of fee-earners in H2’14 and H1’15 did not trigger the desired uplift in revenues; meaning that spare capacity was cut in H2, leading to a 20% drop in sales headcount (-61) to 242; split Engineering -26, and Professional Services -35 including Barclay Meade
Part of the reason for the slow-down has been due to muted demand at a few engineering clients, coupled with MTEC’s exposure to the ‘temp’ and oil/gas sectors, and less extensive presence in ‘permanents’ and City hiring, where activity levels are strong as employer/candidate sentiment returns.
All the same, we believe that this temporary ‘air-pocket’ in NFI growth will reverse over the next 9-12 months, as the new ‘leaner’ sales structure beds-down and benefits crystallise from the acquisition. What’s more, shareholders are being paid handsomely to wait, with an industry leading dividend yield (see next table) on offer.