The channel's newest buy-and-build outfit, Pinnacle Technology, has acquired its first two resellers – and is on the lookout for more targets with £2m to £5m revenues.
Pinnacle says its acquisitions of Leeds duo Ancar-B and Weston represent just the opening gambit in its strategy to consolidate the "highly fragmented" market for SME-focused IT services providers.
The acquisition drive is part of new backer MXC Capital's strategy to refocus Pinnacle and return it to profitability.
Having invested in the London-listed telecoms, IT services and security provider outfit last April, MXC is leading a £4.5m placing of new shares to fund Pinnacle's purchases of Leeds-based duo Ancar-B and Weston.
MXC has a pedigree of investing in loss-making resellers and services firms before using them as the basis to execute a successful M&A roll-up. However, annual results released on Friday underline the scale of the challenge MXC faces at Pinnacle, as the firm's net losses for the year ending 30 September hit £1.3m on revenues that fell to £7.9m. It was also announced that Pinnacle CEO Nicholas Scallan intends to step down in March.
The first two acquisitions, set to close on 11 February, will add almost £5m to Pinnacle's turnover.
Ancar-B, which is being acquired for a consideration of £3.5m, is a Leeds-based provider of IT support services to SMEs with revenues of £2.2m.
Fellow Yorkshire-based business Weston is a provider of telecoms and IT support services to SMEs, councils and universities and has revenues of £2.8m. Pinnacle is buying it for £1.5m.
The two firms will create a hub for centralised support functions, Pinnacle said.
The price is right
The firm said it will continue to review future acquisition opportunities, adding that companies with £2m to £5m revenue, 50 to 60 per cent recurring revenue and local offices and support centres that can be streamlined top its hit list.
Opportunities in the north of England will be viewed favourably in the short term, partly due to labour costs, Pinnacle said, although it added that in time it aims to have a national presence.
For its fiscal 2015, Pinnacle saw net losses narrow from £1.8m to £1.3m year on year on revenues that fell six per cent to £8.4m. The firm said its ongoing losses and cashburn – which it attributed partly to the after-effects of an ill-informed acquisition strategy at the turn of the past decade and to "previously reported acts of wilful misconduct" – "show the business is in need of a change of strategy".
At the same time, the market of "smaller, sub-scale IT services providers" is highly fragmented and ripe for consolidation, it argued.
Pinnacle said the multiples payable for SME-focused providers will typically be lower than those larger, more established providers command.
Ancar-B made an EBITDA of £0.57m last year, meaning its acquisition by Pinnacle carries an earnings multiple of 6.8. Weston's EBITDA of £0.22 mean its acquisition commanded an earnings multiple of 6.1.
Gavin Lyons (pictured), an MXC partner who recently became executive chairman of Pinnacle, said: "We believe that strategically there is a market opportunity for Pinnacle to become the leading provider of 'IT as a service' to the UK SME market, despite a number of operating challenges to address, by embarking on a buy-and-build strategy and focusing on higher margin services.
"The acquisitions of Ancar-B and Weston are the first steps in consolidating a highly fragmented market and I look forward to ensuring the organisation is focused on creating both customer and shareholder value".
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