The Speedcast International Ltd (ASX: SDA) share price rose 1 cent to $3.79 this morning after the company announced another acquisition, this time of US-based UltiSat.
Speedcast has extended its debt facilities to fund the purchase of UltiSat, which will cost US$65 million with a further US$35 million in earn-out payments in 2018 and 2019 if the business lives up to expectations.
Growth by acquisition
The acquisition is expected to give Speedcast a greater footprint in the Government satellite internet sector, and a number of valuable assets such as a teleport facility in Denmark. Speedcast will also establish a new Government division to drive earnings in this sector.
UltiSat's acquisition is priced at approximately 7x 2017's earnings before interest, tax, depreciation and amortisation (EBITDA), which will reduce to 5.5x if all the forecast synergies (cost reductions) are achieved, which is not a high multiple.
Debt concerns
Most notably, the purchase required Speedcast to extend its debt facilities by a further US$60 million, blowing net debt out to more than $400 million based on the figures given at the half-year. This will result in a 'leverage ratio' (net debt divided by annualised underlying EBITDA) of at, or below 3x by December 2017.
This is an elevated level of debt and in my view materially weakens the company by stretching it financially and increasing its vulnerability to unforeseen shocks. Additionally, the quoted leverage ratio is not actual EBITDA (actual earnings right now) but 'annualised underlying' EBITDA which relies on full-year impact from acquisitions as well as all forecast synergies being achieved.
Speedcast has a track record of acquisitions which may ameliorate some of the risk, but in my view the company should be seen as high risk by investors until its balance sheet strengthens and/or it becomes clear that recently acquired businesses are performing to expectations.
