Melita Ltd’s recent acquisition by Goldman Sachs Alternatives, the private equity arm of a large, prominent US bank, was widely reported in the media recently. Although the transaction does not directly impact the local capital market, as Melita’s shares are not listed on the Malta Stock Exchange, it nonetheless has important implications for the investment community as Melita is one of Malta’s three main telecom players.
Changes in the shareholding of telecom operators is not uncommon in Malta. In fact, there have recently been changes in the major shareholders of all three operators. Melita were acquired by EQT Infrastructure IV Fund in 2019 from Apax Partners and Fortino Capital. That year, Vodafone Malta Ltd was sold by Vodafone Group plc to Monaco Telecom at an enterprise value of €250 million (which translated into an EV/EBITDA multiple of 7.8 times at the time) and subsequently changed its name to Epic Communications Ltd.
GO plc’s latest change in its major shareholder was in 2016 when Tunisie Telecom was chosen as the preferred bidder for the majority stake previously held by Emirates International Telecommunications Ltd, a member of Dubai Holding. Tunisie Telecom now holds 65.4% shareholding in GO plc. The remaining shares are held by the investing public and listed on the MSE.
Mergers and acquisitions (M&A) are normally given prominence in the international business media and often lead to fluctuations in international capital markets. Although there was coverage in the local media of Melita’s acquisition, an analysis is warranted as the deal provides an interesting insight in the context of GO plc, which is listed on the MSE.
GO’s share price is near a multi-year low of €2.68
Melita and GO have very comparable businesses. Each own a nationwide high-speed internet network, a mobile network, as well as premium TV offerings. Both also operate data centres in Malta and offer direct business-to-business solutions over and above their vast retail client base.
The Malta Communications Authority regularly publishes key market indicators that include the number of subscribers in each telecom segment. Melita and GO practically share an identical client base for fixed broadband and together they service over 90% of local subscriptions. The two also virtually exclusively service the local pay-TV subscriptions, where Melita holds 60% market share compared to GO’s 40%. GO holds a stronger presence in mobile telephony (35%), compared to Melita’s 23%, although Epic has the largest market share at around 42%.
In the telecoms sector, a key performance indicator is the Average Revenue per User (ARPU), which indicates the revenue of each customer. A more detailed analysis of each segment’s ARPU sheds an interesting light.
The major difference between GO and Melita relates to GO’s larger international exposure through its 70.2% shareholding in Cablenet Communications Systems plc, a telecom operator in Cyprus. GO’s shareholding in Cablenet has risen incrementally throughout the past years, with the latest increase in shareholding taking place in 2022 when GO increased its stake from 63.4% to 70.2% for a consideration of €5.75 million. At the time of the transaction, this took place at an enterprise value of Cablenet of €145 million and an EV/EBITDA multiple of 7.8 times based on the 2022 forecasted figures.
Cablenet remains on track to become a national full-service telecom operator in Cyprus as it now holds sizable market shares across all business segments, with the mobile telephony retail segment being the principal growth driver. As the company is still the smallest of the four mobile operators in Cyprus, there is room for further growth in the mobile segment. Cablenet’s mobile subscribers nearly tripled in the past two years and reached 142,000 in 2023, compared to less than 50,000 at the end of 2021.
Bloomberg News recently reported that sources estimated that the deal by Goldman Sachs Alternatives valued Melita’s business at around €750 million. This figure normally refers to the enterprise value, which includes overall debt and borrowings, and therefore not directly comparable with the market capitalisation of listed companies, which would be the market value of equity.
As Melita is not listed on the MSE, the market is not updated with the company’s financial performance. Nonetheless, the latest financial statements for 2023 available on the Malta Business Registry show that Melita generated earnings before interest, tax, depreciation and amortisation (EBITDA) of around €60 million in each of the last two years. As such, one can estimate that the transaction is based on an enterprise value to EBITDA multiple of 12.5 times. This figure seems to be on the higher end of the multiples at which other telecom companies in Europe are currently trading at, with the median EV/EBITDA multiple at just over five times. Nonetheless, one can find a wide range of multiples across telecom companies due to the varying dynamics of the business models, such as the expected capital expenditure these companies need to allocate and the expected return on invested capital.
GO’s share price is near a multi-year low of €2.68. Given the total number of shares in issue, the market capitalisation works out at €271.5 million. As at June 30, GO Group’s net debt was circa €200 million. The group’s enterprise value is around €530 million when accounting for Cablenet and BMIT Technologies plc’s minority shareholders.
Given the group’s recent financial performance and the forecasts published by Cablenet and GO as a standalone company (the Malta telecom business), it is fair to assume that the group will generate an EBITDA in excess of €85 million in 2024. In essence, the EV/EBITDA multiple of GO currently stands at circa six times.
In 2024, GO is expected to complete its nationwide fibre internet network and thus the level of capital expenditure should be lower in the coming years, which should translate into higher free cash flows. Meanwhile, GO has also embarked on a series of small acquisitions aimed to diversify its business from a pure telecom operator. The acquisitions were in the cybersecurity sector and the renewable energy sector.
M&A activity is prevalent across the international capital markets and is a key determinant of price discovery and trading volumes. The recent takeover of Tigné Mall plc was a clear case study in this respect, with the final takeover price being at a premium of 26.8% compared to the initial trades conducted by Marsamxett Properties. In the process, this also provided an exit route to all minority investors. Hopefully, increased M&A activity will take place across the Maltese equity market.
Jonathan Falzon is a research analyst at Rizzo, Farrugia & Co (Stockbrokers) Ltd.
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