Serial channel entrepreneur Ian Smith is aiming to build a mini Capita by acquiring and fusing together a string of small public sector managed services outfits.
Talking to CRN as his new venture, Castleton Technology, made its first purchase in the form of Montal, Smith said he planned to acquire as many as nine firms in a sector he has identified as having strong growth potential.
Smith said Castleton – a brand formed last November from the remnants of Redstone – has an opportunity to mirror the success of public sector IT giants Civica and Capita, but on a smaller scale.
"Capita and Civica have been busy gobbling up lots of public sector IT businesses over the years and I think we have an opportunity to wrap up a number of smaller firms and put them into a medium-sized business," he explained.
Backed by his corporate finance vehicle MXC Capital, Smith said Castleton would emulate his previous M&A roll-ups, which include security services outfit Accumuli and storage VAR Xploite, by making a series of rapid-fire acquisitions in a market niche.
"When we are doing a roll-up, we will make anywhere between three and four and eight and nine acquisitions," he said. "We are a bit opportunistic about it. When we identify a market sector, it drives deals to us."
Smith added: "The whole IT market is migrating towards services and there are a number of government initiatives aimed at driving business towards smaller players, so [public sector managed services] is a good place to be right now."
Castleton will consider buying "classic IT resellers", provided they are on a migration path to services, Smith said.
Although Castleton sold Communica – the rump of Redstone's remaining business – for £9.5m in November, the move left it with cash reserves of just £3m.
The AIM-listed firm is shelling out £3.83m – £3.04m in cash – on its first acquisition, Montal, a public sector IT outsourcing outfit specialising in the social housing and care-provider market.
Working with vendors such as Microsoft, Citrix, Cisco and VMware, Montal posted an EBITDA of £481,000 on sales of £5.7m in its fiscal 2013 ending 30 September. It will act as a "platform" for future acquisitions.
Castleton is due to bag £1.1m in November as a deferred consideration in relation to the Communica sale and a further £300,000 deferred consideration from other recent disposals. Castleton is also now generating cash in its own right, Smith added.
"There's more cash to come, so I would imagine [future acquisitions] would be a combination of debt and equity," he said.
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