Telefonica Tech UK&I targets more M&A following Cancom deal

‘I’d be surprised if we hadn’t made an acquisition by the middle of the year’, claims UK&I boss Martin Hess

Telefonica Tech is eyeing up more acquisitions in the UK following it acquisition of the UK and Ireland operations of Cancom for £339m last year.

The Madrid-based technology services company expanded into the UK market last July through acquiring Cancom's UK and Ireland assets at a price of almost 16 times the businesses' EBITDA for full year 2020.

Following the buyout, Telefonica Tech's UK and Ireland boss, Martin Hess, said that the Spanish company was willing to invest in the UK business to create the country's leader in cloud and cybersecurity.

Speaking to CRN recently, Hess said that more M&A is likely to follow this year which will take the UK and Ireland operations past the £200m revenue mark.

The UK and Ireland business turned over more than £150m in revenue in its last financial year and produced an EBITDA of £24.5m, Hess said.

The CEO added that an acquisition is likely to come "by the middle of the year".

"The view from Telefonica Tech is that we were a good acquisition. They've only got six or seven months to go on, but they like the way we engage with them and they like the numbers.

"I think we're doing what we said we would do and therefore they want to give us the capital to make the right acquisitions. I'd be surprised if we hadn't made an acquisition by the middle of the year," he said.

Hess said that the firm's first acquisition will focus on growing its presence in cloud, apps and data, and that cybersecurity acquisitions might follow later in the year.

He added that strengthening Telefonica Tech's multi-cloud offering by partnering with other cloud providers such as AWS is on the agenda, but said that acquiring around Microsoft's cloud portfolio is "probably a higher priority".

"We would like to strengthen our AWS position as well. But it's a question of waiting for the right opportunities to come along to be honest. There are not that many AWS assets out there that we can buy," he said.

"We've got more capabilities with Microsoft; we're big in Microsoft already and there's an opportunity to get even bigger so it's a bit easier to grow the Microsoft business. The enterprise space is where Microsoft are really strong. I think for us to become big in the AWS space, we would have to acquire, so we're looking at AWS companies as well.

"It's not a matter of one rather than the other, but we will probably make another acquisition in the Microsoft space first."

Its next acquisition will likely be in the £20m to £60m revenue range, said Hess, but could be lower if the right opportunity to buy a smaller specialist firm presents itself.

"I think M&A will continue. As long as Telefonica Tech judges us on our numbers and as long as they've got confidence in us, they'll give us more capital to spend," he said.

The Telefonica Tech UK&I business is itself the product of several acquisitions. It is made up of acquisitons made by former owner Cancom during 2018 and 2019 including Cisco partner Ocean Intelligent Communications, £85m-revenue VAR OCSL and Northern Ireland MSP Novosco.

The Telefonica Tech boss commented on a growing trend in the channel of businesses making several acquisitions in quick succession.

Hess warned of the dangers in companies acquiring many business in quick succession without integrating them.

"There's a lot of companies out there that are just acquiring without integrating and they just end up being a bag of bits," he said.

"You can't keep acquiring without integrating… Platforms have to be shared. You've got to have common financial systems, service delivery system platforms, common CRM systems. There's nothing wrong with having business units, but you need top-line leverage as well. How do you get top-line leverage if every business is independent of itself?"

Telefonica Tech has laid out aspirations to become the UK leader in cloud and cyber and is willing to make the necessary investments to make that ambition a reality.

But Hess said that the move shouldn't be seen as a sign that Telefonica Tech will walk away from its traditional resell business, or stop being competitive in selling on-prem infrastructure.

He did, however, admit that Telefonica Tech's resell business will only produce "single-digit growth" compared to the double-digit growth opportunities in cloud and cybersecurity.

"We still think there's money to be made in servicing clients that aren't moving all their workloads to public cloud - we still think there's good business there," he said.

"Most of our traditional on-prem customers are looking at public cloud in one way, shape or form, so we're doing a lot of selling into that base. That's one of the reasons we want to stay in that traditional hardware resell market, because we can leverage other opportunities from it."