Industry Spotlight – Q Advisors on European UCaaS Consolidation

February 21st, 2018 by · Leave a Comment

Consolidators in the unified communications as a service space have been quite active lately, especially over in Europe.  With us today to help us understand what is going on and why are Q Advisor’s Partner Gerry DeHaven and Managing Director Andy Monroe.  Q Advisors is a global boutique investment bank that has been directly or indirectly involved in much of the consolidation in the UCaaS space on both sides of the Atlantic over the last few years. 

TR: What has been driving UCaaS consolidation in Europe?

GD: There have been a bunch of regulatory changes that have knocked down some barriers for network connectivity, and other providers have come in and made cross-border options in the UCaaS part of the MSP model a lot easier. In general, just as we see here in the U.S., there is the need for larger players to continue to expand their solutions, but lack the internal DNA or, frankly, the time to go out and build the necessary skill sets organically.  So they are looking for acquisitions in the managed services sector to really accelerate what they can do organically and, at the end of the day, generate a higher ARPU from their existing commercial customer base.

AM: Adoption rates are accelerating, and it’s become easier to create a pan-European business model than it was three to five years ago.

TR: How far long is the process of UCaaS uptake in Europe?

GD: The UK is by far the most mature market.  There are more players – both traditional VARs and MSPs – and there are higher adaption rates. But the rest of the markets remain three to five years behind North America in general adoption rates. Germany’s a great example. It’s the largest economy by far in Europe, but for things like hosted UCaaS, the adoption rate is still sub 5%. And it’s one of those markets where customers actually like the incumbent or are at least very reticent to move from the incumbent. It’s really taking a while to establish the value proposition by these smaller guys. But we’re starting to see that happen more and more.
TR: What about other parts of Europe?
AM: The rest of Europe, while perhaps not as dramatically low as Germany, is certainly far less mature than the UK as well. The only exceptions are the Netherlands, which seem to be disproportionately entrepreneurial and technical in terms of developing new technologies, and France.  When you start to talk about Italy, Spain, and the Baltics, it’s still in the very early stages, which many people view the next leg of opportunity, even though there’s still plenty of opportunity in the UK and other more advanced countries.

TR: Who do you see as likely acquirers of UCaaS and MSP assets in today’s market?

GD: In general, we see companies like Exponential-e and Six Degrees as emerging large players in the space that will continue to be acquirers.  Another trend is that there is a fair amount of interest from both US strategic companies as well as private equity firms who are looking in Europe for an initial beachhead.

TR: What deals in this sector have you been involved with lately?

GD: Recently we have been involved in the Swyx transaction in Germany, which is a hosted UCaaS MSP that was acquired by a large Dutch private equity firm. Its plan is to use it as a platform to acquire other managed service plays. Last summer we helped sell a UCaaS and MSP business called Mtel based in Rotterdam to Evolve IP.  We’ve also worked with a US-based private equity firm called Investcorp on their initial investment in a company called Calligo on the Isle of Jersey, which has subsequently acquired four managed service providers across Canada, the US and Luxembourg.

TR: How different is it to do deals in the space in Europe versus North America?  Does it take longer?

AM:  From a process standpoint, I don’t think there’s a difference in terms of how long things take. I think there are different nuances within the various countries within Europe that can elongate a process or make things complicated; whether they be regulatory, cultural, or even compliance-related. So we don’t think things are taking longer simply because they’re European, or because they’re transatlantic, or cross-border. There are just some differences between how things are done there and how things are done in the United States that come with the process. There is nothing extraordinary that’s pushing things to a longer timeframe.

TR: What regulatory issues are making the European UCaaS sector attractive right now?

GD: It’s just that old legacy, ISDN networks are being retired.  Germany is seeing a wave of new connectivity players come in or partner with Deutsche Telecom.  Companies like Voxbone are tackling the compliance and regulatory portion of the MSP solution really on a country-by-country basis. So while they can do simple stuff like providing telecom carriers DIDs they are also really almost an outsourced compliance and regulatory service for companies country by country and they’re not the only ones — PCCW is done a reasonably good job, maybe Colt as well. But driven by the regulatory changes, the opportunity to have third-party relationships to accelerate your entry into new European markets is much more available today than it was three to five years ago.

TR: What types of targets are consolidators looking for? 

GD: The common theme is recurring revenue.  From there is a real focus on mid-market and up, and I think it’s about complementary attributes that the acquirer doesn’t have so if they’re focused on UCaaS but don’t have a cloud IT existing business, then they’re looking to acquire it.  That leads to this one-throat-to-choke solution that we see a lot of these players pursuing.

TR: Where are the incumbents in all this?  Are they consolidators too?

AM: The incumbents across Europe have been pretty good about partnering and utilizing some of these emerging technologies. In some ways they are competitors and in other they are often partners, and they are probably going to be eventual consolidators. They tend to be a little bit less dynamic on the M&A front, although they’ve been keen to try out some of these smaller, newer technology platforms and providers from a partnership standpoint. For example, Swyx’s primary partner and customer is Deutsche Telekom, which is the incumbent in Germany. So you’re talking about a leading edge software or UCaaS software provider partnering with an incumbent from a solutions standpoint, and it works for both parties. I wouldn’t rule out the incumbents in Europe, from a consolidation or any other standpoint. They’ve just been a little bit more proactive in partnering and enabling some of these earlier technologies.

GDYeah. In fact, we’ve done a few deals where one of the real attractive components to the business is their existing contractual relationship with the PTT in country. One of the biggest catalysts for a recent contact center  we did in the  UK was the Company’s  relationship with BT. We’re also working with another company in Scandinavia who has a relationship with one of the PTT’s  that’s, again, an attractive attribute and perhaps lower customer acquisition cost model initially for some of these players to come in from outside the country.

AM: That’s part of the attractiveness for a US consolidator in Europe because many times, a US consolidator doesn’t have quality or existing relationships with the incumbent. So from an acquisitions standpoint, if they can acquire a company that has those established relationships and channel partners within Europe, it makes it a bit more attractive.

TR: Is there any interest in the other direction?  Are European UCaaS consolidators starting to look to North America at all?

GD: Yes, we are starting to see is a little bit of the reverse, probably more along the northeastern corridor because of the connections in the financial community between London and New York. We’re seeing some interest from bigger European traditional network and MSPs plays, , who are looking at some US companies too. And I think that’s a trend that will continue, particularly if the dollar stays as weak as it is.  As an example, companies like Atlantic Metro in New Jersey, which has a huge contract with a very large European auto company for their US business are being considered to provide services in Europe. That often requires them to partner, and partnership discussions like those often lead to something potentially more strategic.

TR: It seems like we are seeing UCaaS players eyeing MSPs more often than the other direction, why do you think that is?

GD: There’s a fairly big delta in terms of valuation right now – UCaaS guys being valued much more than most, not all, MSPs. If you think about consolidators here like ConvergeOne or Carousel or some of the other traditional players, while they are rapidly evolving their models to be more recurring managed services, at the end of the day, they’re still generally trading at five and six times EBITDA.  Meanwhile, proprietary UCaaS platforms are trading at five times revenue in some cases. So it makes it harder for those guys to rationalize. There are some exceptions and I think some data center players who have extended their model into more of a services play rather than purely a real estate play may. They have a different set of valuation metrics and can probably rationalize price, but we just haven’t seen it come from that side yet and likely need some time for their model to move towards uCaaS in a meaningful way.

TR: How do you see differences in valuation between the US and Europe in this space right now?

AM: The growth rates are higher there, so there’s a different way to look at valuation, whether be from opportunity-based standpoint, versus, a more mature standpoint. I’m not saying that the growth has topped out in the US, because it hasn’t. But it just requires a bit more focus on growth and opportunity when they’re actually valuing and buying these companies, especially in Europe. There’s no metric or set dynamic as how things are being priced there, versus, here. Maybe just a slightly different lens when the buyers are figuring out where the opportunity is.

TR: What do you see ahead for Q Advisors when it comes to UCaaS consolidation in Europe?

GD: A lot of trips to Europe, and probably an office in Europe at some point soon. We’ve made an effort as a firm to focus on it over the last two years. Probably, 30% of our transactions have an international component, and a majority of those are in Europe. I think we’re going to continue to ride the wave.  We see some things happening in Asia and in Latin and Central America. But because the PE firms in the US and the bigger strategics in the US have put a stake in the ground in Europe first, it makes sense for us to be spending a lot of time there.

TR: What kinds of opportunities are you seeing in Latin America and Asia?

GD: I think that’s probably a bit longer term, and right now the focus there is more on the infrastructure that will eventually lead to these cloud-based services. That cycle’s probably three to five years away.

TR: Thank you for talking with Telecom Ramblings!

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Categories: Industry Spotlight · Mergers and Acquisitions · Unified Communications

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