Speculation surrounding business telecoms supplier Daisy (DAY) seems to be coming to a head as rumours spread of takeover talks between the company's entrepreneurial boss Matthew Riley and Virgin Media, now owned by John Malone's Liberty Global. According to reports, negotiations may have broken down over price, with Virgin seemingly reluctant to meet the mooted 220p per share demanded by Riley, an offer that would value the UK company in the region of £580 million.


That might seem rich for a company that is predicted to deliver roughly £356 million of sales for the year about to close at the end of this month, and earnings before, interest, tax, depreciation and amortisation (EBITDA) of close to £58 million, based on Liberum estimates, equating to 10 times EBITDA.


Yet the well-informed analysts at IT and telecoms consultancy Megabuyte disagree. It argues such a price would be in the same sort of ballpark as recent acquisitions in this space. Megabuyte's Philip Carse says 220p per share 'does not seem an overtly ambitious target given current telecoms and networks multiples of 8x to 12x, with Alternative Networks (AN.) on 11.7x and TalkTalk (TALK) on as much as 15.5x (reflecting EBITDA being depressed by investments in TV),'

DAISY GROUP - Comparison Line Chart (Rebased to first)

Shares interviewed Daisy's bright young boss back in 2011 and even then there was a sense that the company's buy and build strategy would end up in a sale of some sort.


Now increasingly looks like a D-day for a deal to get done. According to The Times' Nic Fildes, 'high-level talks' between Vodafone (VOD) executives and Daisy took place last year about a potential combination with the mobile group's Cable & Wireless Worldwide network, although according to the newspaper Vodafone has now distanced itself from making a bid.


A Daisy tie-up with IT infrastructure services group Phoenix IT (PNX) has also been rumoured for a while, a deal that would have added about £230 million of revenues to Daisy, albeit at a much lower EBITDA run rate. But integration challenges would be substantial for this deal to happen and Phoenix seems to have decided, for the time being at least, to go it alone, earlier this week appointing industry veteran Stephen Vaughan as chief executive and raising £8.6 million of fresh funds via a share placing.


That may leave Virgin/Liberty in the box seat, which may also explain its hard-ball negotiations over the Daisy take out price. Liberty paid only 8.8x historic or 7x expected EBITDA for Virgin Media just over a year ago, and is paying just 11.3x EBITDA for Dutch cable TV operator Ziggo, which comes with billions of network assets.


The apparent strong hand held by Liberty/Virgin, and the absence of an obvious rival bidder to spark a buyout battle that will push the price substantially higher perhaps explains why investors are not getting terribly carried away. Daisy's share price has risen only 2p today, or barely 1%, to 190p. That said, according to Megabuyte's Carse, 'telecoms & networks have been the best performing of the Megabuyte peer groups in share price terms over the last year, and Liberty/Virgin will have to stump up higher valuations anyway if it wants to buy sizeable companies.'

Issue Date: 14 Mar 2014