In November 2020, mid-market private equity firm LDC partially exited its investment in the self-styled ‘unified communications provider’ Babble to financial buyer Graphite Capital, in
a deal that valued the business at £90m. The communications and cyber security company provides hosted telephony, communications, cloud contact centres, mobile and enterprise connectivity to around 2,000 clients, which are largely UK-based SMEs.
Back in 2017, LDC backed a management buy-out of Babble by making a £4.6m investment for a majority stake in the business. Over the intervening three-year period, LDC supported Babble’s growth plans with a further £9m of investment. Turnover increased by 230%, and headcount doubled. Increased revenue came from a combination of organic growth and acquisitions. In 2018, Babble acquired Direct Response and then Birmingham-based Arden Group, in a deal that doubled its revenues to almost £20m and customers to 1,200. The following year was spent consolidating and integrating the acquisition. Then in 2020, it made four acquisitions: Leeds-based Diva Telecom in January; Lake Technologies in July; Corporate Management Telecom (CMT) in August; and, just before the business was sold in November, Shape Networks.
On the market
In response to inbound interest in the company, LDC began exploring the sale of Babble during summer 2020. Chris Morris, investment director at LDC, who led the sale, says: “The company had performed well during the lockdown, which was strengthening demand for this sector, and we were receiving a lot of interest from potential buyers.” LDC investment manager Tom Jervis and head of London Yann Souillard also supported the Babble investment and the sale process.
Babble’s resilience and growth profile had attracted a good deal of private equity attention. “The business provides communications and connectivity to SMEs and has strong recurring revenues, so demand remained under COVID-19. Arguably, it increased its importance, albeit with the challenges of not being able to conduct sales face to face,” says Morris.
Elsewhere in this sector, recent deals include MML Capital Partners’ acquisition of Arrow Business Communications in January 2020, which is understood to have carried a 10x multiple price tag. In March 2020, Bowmark Capital bought communications and IT company Focus Group in a deal reported as having a 13x multiple. Elsewhere, Beech Tree portfolio company Wavenet is rumoured to be coming up for sale, attracting a double-digit multiple.
Against this backdrop, it is understood Graphite paid a similar multiple for Babble. The acquisition of the majority stake was the fifth investment from the £500m-plus Graphite Capital Partners IX fund. Debt for the deal was provided by the relatively young European private debt fund Apera Capital, which was set up in 2016.
Babble’s CEO Matt Parker said: “LDC didn’t just buy into our business, it bought into our vision and backed us as a team to deliver it. The past three years have been transformational for us and we are well on our way to becoming a £100m-revenue business.” He added that he was pleased LDC had retained a stake.
Story of two halves
Despite Babble’s clear attractions, the fast pace of recent acquisitions meant detailing the company’s growth in numbers was particularly tricky. Natalie Stacey, a corporate finance director at RSM, who led the financial due diligence, explains: “At a cursory glance, you may look at Babble’s acquisitions and see that as the main growth driver, but through the financial due diligence we were able to demonstrate it had also achieved double-digit organic revenue growth.”
Simon Davies, managing director at Spectrum, who provided LDC and Babble with corporate finance lead advisory services with James Mines, director and head of technology at Spectrum, explains: “We needed to demonstrate to prospective bidders that Babble was a company that had grown by acquisition, but had also delivered strong underlying organic growth. Our challenge was to isolate the organic growth in the financials – this required a lot of in-depth financial modelling and data analysis – to thoroughly differentiate between the customer cohorts from various acquisitions, and organic growth achieved from the core service streams.”
The Spectrum team compiled a ‘run rate’ of the business versus the previous 12 months. “This demonstrated the underlying organic growth of the business, then layered on the new acquisitions and their associated structural and technical cost savings. The result was a very clear picture of how the acquiring businesses contributed to overall growth of Babble, and also demonstrated the strength of the integration plan as it was able to quickly realise cost savings and improve the revenue of the newly acquired businesses.”
Clear winner
Babble’s sale attracted around a dozen private equity bidders, which were whittled down to about half a dozen serious contenders as the deal process progressed. “We always expected interest would be exclusively from private equity,” says LDC’s Morris. “The continued buy-and-build strategy requires a financial sponsor. Plus, the benefit of selling to another private equity firm meant we could reinvest in a strong team and continue to support them.”
Graphite’s intense focus on the business saw it win the deal. “I’ve known Babble’s CEO Matt Parker for seven or eight years,” says Humphrey Baker, a partner at Graphite. “We stayed in touch when he joined Babble and enjoyed watching the business progress under LDC’s ownership.”
The combination of Graphite’s relationship with management, its deep understanding of the business, and the clear, organic growth story presented through the detailed financials, meant the deal process moved quickly.
“From sending out the investment memorandum at the end of September to completion in early November, this was a very quick deal,” says Spectrum’s Davies. “That was down to the level of preparation on the legals, the preparation of the data room, the quality of our financial models, and the vendor due diligence, meaning the buyers were able to move quickly.”
Emma Havas, a partner at Travers Smith, who provided legal advice to Graphite, adds: “We were able to do this deal so quickly because of the relationship between Graphite and management. Everyone bought into the timetable and there was a high level of collaboration between both sides.”
Continued support
Following the deal, Graphite and LDC will support Babble’s continued organic and acquisitive expansion strategy. Baker says: “Critically, it’s about maintaining the organic growth rate, which becomes more challenging as the business scales. We will focus on differentiating its products and proposition, as well as accelerating scale through continued buy-and-build.”
Immediately after Graphite’s investment, Babble acquired Ultracomms, a contact centre as a service (CCaaS) and end-to-end voice and data solutions provider. “We closed the first acquisition prior to Christmas and we have a number of further deals in the pipeline,” he adds.
The momentum within its contact centre proposition and performance of its communications offering will support further fixed-revenue growth. “The focus is on differentiation, but also building out nascent skill sets in the business. The Ultracomms acquisition significantly increased Babble’s CCaaS footprint, which is a really attractive and fast-growth area. Building out the cyber proposition, which is nascent at the moment, is important and we will look to invest in that as well,” says Baker.
Morris says: “The Babble deal is a good case study of a supportive private equity investor who’s well aligned with the management team, and that team doing a really good job of executing that plan. Matt and team have done a fantastic job, and we look forward to seeing them go from strength to strength in the future.”
About this article
This is extracted from the full article in the Corporate Financier March 2021 edition - exclusively for Corporate Finance Faculty & Faculties Online members - who can access our highly regarded magazine in its originally designed form, as well as our extensive archive brought to you by the ICAEW Corporate Finance Faculty.
