DWS (ASX:DWS) has entered into a scheme implementation agreement to acquire SMS Management and Technology (ASX:SMX), in a deal valued at approximately $124 million.
Terms of the buyout will see the combination of two IT services groups, designed to create a “leading Australian IT services provider” with the size and capability to fully service the market.
DWS said, in a statement on the ASX, that the combination of both entities will provide consolidation in the Australian IT services market, a “goal that has been sought by industry participants over many years”.
The purchase, when completed, will also see the merger of SMS’ IT services - IT consulting and development and implementation business, managed services, and labour hire services - with DWS’ core strengths across IT consulting, managed services, and labour hire services.
SMS’ longstanding relationships with key clients in the enterprise market, and with state and federal governments is also said to boost DWS’ portfolio.
"Acquiring SMS will enable DWS to offer services across the full spectrum of the IT services market and give rise to numerous cross-selling opportunities,” DWS said.
“In addition, the combination of the two IT services groups will allow SMS clients to benefit from the additional IT service offerings provided by the DWS Group, including the digital and customer innovation services offered by Symplicit and the business efficiency serviced provided by the acquisition of Phoenix.”
In June 2015, DWS acquired user experience (UX) digital design and innovation consultancy business, Symplicit, for an up-front payment of $8.5 million, followed by further payments up to a total of $6.5 million conditional on adjustment of the up-front price based on final FY2015 EBITDA and EBITDA growth performance over a three-year period.
In August 2015, DWS bought 75 per cent of Phoenix IT & T Consulting for $19.5 million, with Phoenix founders, Hayden Kelly and Andrew Henderson retaining the remaining 25 per cent of the business.
Under the DWS/SMS transaction, SMS shareholders will receive $1.00 in cash and 0.39 DWS shares for every SMS share, representing an implied value of $1.66 (scheme consideration).
In addition to the scheme consideration, SMS declared a fully franked interim dividend of $0.015 per SMS share, without reduction to the scheme consideration and representing additional value to SMS shareholders.
DWS CEO, Danny Wallis, said the acquisition of SMS is “transformational for the DWS and SMS businesses”, and the Australian IT services market as a whole.
“We are intent on expanding the breadth and depth of our services so we can provide solutions designed to meet our clients’ needs. The acquisition supports this commitment, and we anticipate it will generate real value for our employees, clients, and shareholders.
“The DWS team is delighted to welcome SMS’ talented professionals to DWS in due course, as we continue growing and expanding our portfolio of business solutions across the IT services sector,” he said.
In addition, Wallis mentioned that the combination of the two groups will increase the range of government and blue chip clients that they can work with and support.
DWS management has identified cost synergies of at least $5 million per annum, with “additional benefits” available from efficiency improvements and cross selling opportunities.
The transaction is said to be materially accretive to DWS in the 2018 financial year. The cash component of the transaction will be funded through new debt facilities.
On 13 February, DWS recorded a strong performance in the first half of 2017, revealing its revenue to be $73 million, which is up eight per cent from the prior corresponding period. Additionally, its EBITDA margin improved to 18.5 per cent from 17.7 per cent.
The company also recorded an NPAT of $9 million, up 19 per cent from the prior corresponding period.
However, on 14 November last year, SMS Management & Technology pinned its hopes on the 2017 financial year after structural changes, cancelled contracts, and failed investments hit its 2016 earnings with a 45 per cent decline.
The company reported an eight per cent fall in revenue, to $328.7 million in its annual results in August, along with a fall in earnings before tax (EBITDA), which declined by 45 per cent to $15.7 million for the year ending June.
"Since assuming the role of CEO, I have spent considerable time reviewing our business operations and meeting with staff and clients,” SMS CEO, Rick Rostolis, said previously.
“I have been reassured by our clients that demand for our services and our delivery quality both remain sound. We have developed a detailed plan to restore stability to the business over time,” he said then.
The first court hearing of the purchase is expected in late April.
At the time of writing, SMS’ shares were trading at $1.40 and DWS’ shares were trading at $1.64.