Strategic acquisitions are a core growth strategy for billing software company Hansen Technologies Limited (ASX: HSN). Earlier this year the company added U.S.-based utility billing company PPL Solutions to its portfolio and has committed to continue the hunt going forward.
Specifically, Hansen is looking for 'strategically attractive business[es] strongly aligned with Hansen's key acquisition criteria'.
New Zealand-based Gentrack Group Ltd (ASX: GTK) is significantly involved in billing software and about one-third the size of Hansen. Could Hansen be thinking of adding Gentrack to the shopping cart?
Well, let's run it through Hansen's stated acquisition criteria:
1. Alignment with Hanson's core billing & customer care business
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Gentrack has some clear similarities to PPL Solutions and Hansen's own core business; a Software-as-a-Service company providing billing software for electricity, gas and water utilities. Around 84% of Gentrack's revenue came from these sources in the first half of financial year 2016.
2. Owns the intellectual property in its billing software
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Gentrack's billing products are developed internally, so it owns the intellectual property as a result. In addition, the company's 2014 prospectus notes: "Gentrack typically retains the ownership of any intellectual property shared with customers or developed as part of specific project work or ongoing support."
3. Has recurring revenue streams
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Gentrack reported 30% of revenues came from recurring fees in the first half of 2016, but considers 50-60% of revenue in any given year is likely to reoccur in the following year according to its prospectus.
4. Extends Hansen's footprint into a new market segment
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Hansen already has utilities billing in its portfolio from the PPL Solutions acquisition, but Gentrack would expand this reach while also adding Airport billing to the portfolio.
Looks like a match! But what about price?
Hansen paid about 4x EBITDA for PPL Solutions, a bargain price, but reportedly in the knowledge that PPL Solutions operates at lower margins than Hansen traditionally achieves.
Hansen itself recently reported a 30.5% EBITDA margin and the company currently sells for 18x EBITDA. Gentrack operates at a very similar 30% EBITDA margin.
If Hansen considered its own share price a reasonable measure of comparative value, an 18x EBITDA multiple as a starting price for Gentrack would value the company at around $3.69 per share, a 22% premium above the share price at the time of writing. It is likely though that Gentrack investors (including myself) would demand a higher premium to be enticed to sell.
Hansen Technologies clearly has both the incentive and experience to acquire a company like Gentrack, but given Gentrack's size and likely need to issue equity to fund the purchase, any firm action could be some time away.
