MONTREAL — In a deal valued at $675 million, BCE is acquiring all equity it does not already own in Q9 Networks Inc., a Toronto-based data centre operator, as the telecom giant looks to shore up its ability to compete against domestic and international providers in the growing outsourced data services market, BCE announced Monday.
Q9 Networks was originally acquired in October 2012 by an investor group comprised of BCE, Ontario Teachers’ Pension Plan, Providence Equity Partners and Madison Dearborn Partners. BCE currently holds a 35.4% equity stake in Q9, and it will acquire the remaining 64.6% equity from its fellow investors in a transaction valued at approximately $675 million, including Q9 net debt but excluding Bell’s existing ownership interest, BCE said in a news release to announce the deal. The transaction is expected to close before the end of 2016.
Currently, Q9 provides outsourced hosting and other data solutions to Canadian business and government customers. BCE’s Bell Business Markets and Q9 managed data solutions and interconnected broadband fibre connectivity services are delivered through a network of secure, high-capacity data centres in locations across Canada, BCE said in its news release.
According to a Canaccord Genuity analyst note issued after the deal was announced, BCE’s objective in acquiring all remaining equity in the outsourced data services provider “is to strengthen BCE’s capabilities in this space in the face of growing competition from both Canadian and US operators.”
The note’s author, Canaccord analyst Aravinda Galappatthige, said BCE had provided little financial information regarding the particulars of the equity transaction. Galappatthige pointed out that in the original Q9 acquisition in 2012, BCE paid $185 million for its equity stake, while the other investor partners paid $430 million for the remaining equity.
“Based on our expectation of only very modest growth in EBITDA since the 2012 transaction, we estimate a full acquisition multiple of 10.7x EV/LTM (enterprise value/last twelve months) EBITDA. Note that this calculation includes the $185M BCE paid for the initial 35.4% stake. Given the low FCF (free cash flow) generative nature of the data centre business, we do not believe that Q9’s net debt of $500M (at the time of the 2012 October transaction) has changed much. On that assumption, BCE is only paying $175M for the remaining equity,” Galappatthige wrote.
BCE’s acquisition of Q9 will have a negligible impact on Canaccord’s revision of its valuation for the company, and therefore it is maintaining its buy rating and $66.00 price target for BCE, Galappatthige said.
“We believe that Q9 at this point generates modest free cash flow, but there may be some synergistic savings on that front which could yield higher FCF accretion. It is slightly more accretive from an EPS (earnings per share) perspective with 2017 EPS rising from $3.60 to $3.63. We will have better colour when management provides guidance for 2017,” Galappatthige concluded.
