discoverIE Group PLC, the specialist electronics company, has announced the acquisition of Wales-based telecom components group Silver Telecom (Silvertel) for an initial £21 million, with up to a further £23 million in earn-outs. The acquisition is part of discoverIE's ongoing strategy to expand its differentiated, growth-focused electronics group.
Acquisition details
Silvertel, based in Newport, focuses on high-speed internet connectivity modules. The company generated sales of £13.5 million and profits of £4.4 million in the year to the end of February 2023.
DiscoverIE expects the acquisition to immediately boost underlying earnings and underlying operating margins. The payment will come from cash reserves and debt, with discoverIE's gearing remaining well below its long-term target range of between 1.5 and 2.0 times.
discoverIE's strategy
The acquisition of Silvertel aligns with discoverIE's strategy of building a differentiated, international electronics group with strong operating margins.
Nick Jefferies, discoverIE’s chief executive, commented that Silvertel's product range is highly complementary to the existing group and will gain access to a wider range of industrial connectivity target customers.
According to research by Peel Hunt, the boutique investment bank, the acquisition is seen as earnings enhancing for discoverIE in the Magnetics & Controls division. It anticipates immediate earnings per share (EPS) accretion of approximately 1%.
Company's outlook
Shore Capital, the regional broker, has described the acquisition as a high-quality one. It noted that Silvertel's initial cash consideration will bring discoverIE's proforma gearing from 0.7 to 1.0 times, with an earn-out of up to £23 million payable subject to Silvertel's performance over the next four years.
Shore also highlighted Silvertel's expected 26.2% EBIT (earnings before interest and taxes) margin in the financial year 2024 and its organic growth at a 20% compound annual growth rate (CAGR) over the past eight years.
However, Silvertel's profits are expected to be lower in the current financial year compared to the exceptional performance it delivered in the previous year.
Shore pointed out that the trailing enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortisation) acquisition multiple, excluding the earn-out, is approximately 9.5 times.
In summary
discoverIE's acquisition of Silvertel is seen by the City as a sound strategic move that aligns with the company's growth objectives and focus on differentiated products. "[It] has an outstanding track record of making value accretive acquisitions and has a target EBIT ROI return on acquisitions of greater than 15%," notes Shore.
The acquisition is expected to enhance earnings and contribute to the company's long-term goals. The outlook remains positive, with analysts highlighting the company's strong margins and growth potential, although the current year's performance for Silvertel may be closer to the previous financial year.
The acquisition also leaves room for further acquisitions, keeping discoverIE's leverage comfortably within its target range.