My cloud valuation notes took a right turn when I saw this. The calculator pushed out some numbers I found most interesting… St Louis based Savvis, Inc. (NASDAQ: SVVS) is purchasing Toronto based Fusepoint for $124.5 million, picking up $47.5 million in revenue. Yes 2.62X annual revenues to be exact. It got even wilder when I learned Fusepoint ‘s EBITDA was $12 million…that puts the deal at 10.4X EBITDA. Its a cash deal, and I like cash.
Now the Savvis market-cap is currently trading for 1.08 X annual revenue. In deals where the gap between market cap and deal price (2.62 vs 1.08) is so wide I use the phrase…”What is going on here?”
Over the last month I was impressed with both the VISI/TDS and Central/8×8 deals. Each of those deals were strategic…. Buy this deal has a bit of the WOW factor. Yes this deal is about 1X greater (multiple of revenues) than each of those deals.
Lets pick it apart and comment on why a great value–
Fusepoint owns data centers – but only 40,000 sq ft. (Savvis already has 1.4 million of floor). – Fusepoint’s power utilization is 60% and floor is 70%. So the upside value is not in the property.
Fusepoint is 50% managed servers, 30% Colo and 20% application services. Frankly Savvis does not know what they will do with the application services. Deal Downside?
Fusepoint has decent revenue growth – 2007/ $36 M – 2008 / $42.8 M and 2009 $47.3 M. That’s’s good and you can chalk one up for added value.
Fusepoint is well run. A very respectable 25% EBITDA. That is almost identical to Savvis so you have to look at synergies. Savvis sees some $8 million in near immediate annual efficiencies, impressive and much larger than I would expect. Another value bump. Try adding that $8 million to the $12 million EBITDA. Synergy expectations lowers this to the 6-7 X range. Understandable.
Fusepoint has some great accounts – described as “330 marquee customers”. Clients include Sirius Satellite Radio, Rogers Communications and Canadian Direct Insurance. But none of them are financial and Savvis is really into a financial vertical. Fusepoint misses the financial sector and considers themselves to small to tackle. There is almost no account duplication…you just found the double value bump.
I generally take press releases with a grain of salt — but when I read Savvis CEO’s Jim Ousley quote “Our largest customers have been asking us to expand into Canada, and the acquisition of Fusepoint allows us to do so in a seamless and efficient manner.” I actually believed it.
The primary reason for the value and transaction…Location.
Savvis is not in Canada. Fusepoint is headquartered in Canada’s financial hub, Toronto. And according to Savvis Fusepoint does not see itself as having the size to attack and compete in that lucrative financial vertical. Savvis is a big financial vertical player and the banks in Canada need their reputation.
In my opinion the acquisition is just, if not more important for Savvis in Europe. Savvis has presence in the UK and is opening up in Germany, in partnership with Thomson Reuters.
Canada plays well in the UK and growing Toronto will benefit the UK operations and enhance the European vertical expansion.
From my perspective and analysis Savvis did not overpay for the deal. Full market yes, there is nothing wrong with full market. Full market is often how deals get done. I guess the market does not agree, Savvis closed down 11.86% for the day, equaling $121 million loss in market cap.
As a side note – my broker’s hat it tipped to Signal Hill,they just represented the seller, Fusepoint in this transaction. They also represented Visi in that sale to TDS. They have achieved excellent full values transactions for their clients.
I think I will add part of this to my HostingCon presentation, Monday 3 PM. The presentation is teeing up to be a most interesting thought process.
Later – Tom
More about Tom: NCC International – the Hosting Business Broker Twitter: TomNCC and NCC WebHostBusiness
