Datatec Limited Westcon Inc Acquires Afina Group Conference Call
Jul 02, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
DTC.J - Datatec Ltd
Datatec Limited Westcon Inc Acquires Afina Group Conference Call
Jul 02, 2012 / 08:30AM GMT
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Corporate Participants
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* Jens Montanana
Datatec Limited - Chief Executive
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Conference Call Participants
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* Milan Radia
Jefferies - Analyst
* Franca di Silvestro
HSBC - Analyst
* Steve Minnaar
Abax Investments - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the update of the Datatec acquisition of Afina. All participants will be in listen-only mode. There will be an opportunity for you to ask question at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded. I would now like to turn this call over to Mr. Montanana
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Jens Montanana, Datatec Limited - Chief Executive [2]
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Good morning, everyone, I'll just be saying just a few words and then hand over for some Q&A, just a few words in respect to an acquisition that we've announced this morning and, in fact, have been working on for some time. It's a fairly significant transaction for our Westcon Group division.
Afina, the acquired company, is a privately owned distributor with operations predominantly in Latin America and Spain. The Group has operated for over 20 years and will provide Westcon with almost complete coverage now of South America, Westcon having been in the region for over 10 years with significant -- this is significant expansion of our business's footprint.
The Company acquired, Afina, operates in the fast growing sectors of security and data center technologies, such as virtualization software and represents many of the world's major brands in this space. In particular, we gain a significant footprint in new markets such as Mexico, where we've been small up to now, Colombia, Chile, Peru and other markets and we continue to enlarge our presence in Brazil and Spain as well as adding Morocco as a new market in North Africa.
We first engaged with the Company over two years ago and have built up a strong relationship with management and, culturally, we believe the two companies will be a very good fit. There is also limited overlap geographically and Afina brings us many new vendors that complement our portfolio as well as strengthening some of our existing key relationships.
Over time, we will be able to expand our coverage in these countries with our Cisco operations as well, and this should be a key driver to net new incremental revenue going forward. All of the key management of Afina will remain in their roles and we do not anticipate any functional conflicts. The key profit ratios and earnings of the transactions are enhancing and accretive. I'll hand over now to any questions.
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Questions and Answers
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Operator [1]
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Thank you very much. (Operator Instructions). Our first question comes from Milan Radia from Jefferies. Please go ahead.
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Milan Radia, Jefferies - Analyst [2]
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(technical difficulties).
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Operator [3]
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I'm sorry sir, could you just repeat that please?
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Milan Radia, Jefferies - Analyst [4]
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Sorry, can you hear now?
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Jens Montanana, Datatec Limited - Chief Executive [5]
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I can't hear a thing, I think if the dial-in participants are on hands-free it's going to be hard to hear, if they don't mind participants picking up. If you try again, Milan --
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Milan Radia, Jefferies - Analyst [6]
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Can you hear me now?
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Operator [7]
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Yes, we can hear you now, sir.
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Milan Radia, Jefferies - Analyst [8]
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That's excellent, thank you, sorry about that. So my first question is, just thinking about the vertical split, is it fair to assume that a substantial vertical exposure here will be financial services?
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Jens Montanana, Datatec Limited - Chief Executive [9]
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You mean in this ultimate customer?
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Milan Radia, Jefferies - Analyst [10]
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Yes, exactly.
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Jens Montanana, Datatec Limited - Chief Executive [11]
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Most probably fairly common service providers would mostly be the biggest see-through customer sector. Don't forget in this activity in our distribution business, we're selling through other intermediaries, it's our wholesale channel. So we're selling to other intermediaries that sell to the ultimate customer, but I would imagine that the biggest single segment would mostly be telco service providers, internet operators, online companies, I mean financial services will be a meaningful sector, but it's most probably not the largest sector.
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Milan Radia, Jefferies - Analyst [12]
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Got you and I'm just wondering because obviously Logicalis has a big business now in Brazil, is there an opportunity to do anything between these two businesses, Afina and Logicalis or will Westcon (multiple speakers)
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Jens Montanana, Datatec Limited - Chief Executive [13]
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Yes, absolutely, obviously in Logicalis we enjoy a direct relationship with vendors like Cisco, but in the portfolio that Afina handles, which is security and data center virtualization, there are a myriad of emerging vendors. And, absolutely, I think there's already trade going on with Afina and Logicalis in Brazil and we know there is in markets like Chile and Argentina already where Logicalis already has a significant footprint.
So yes, absolutely, there'll be internal leverage but in particular what we get out of this transaction, the big meter movers for us are Mexico, where hitherto we've had a relatively small presence and now we'll have a significant presence. It's a step game in -- a step change for us, sorry, in our existing operation in Brazil, which is fairly substantial, becomes even more substantial and Spain, where we had a mid-market presence, now we'll obviously have a significant presence.
So they're basically the key step changes in where we currently operate and then in addition I think we add nine new markets -- entirely new markets, Chile, Peru, Ecuador, Central America, Caribbean, Argentina and I think I mentioned Morocco in North Africa.
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Milan Radia, Jefferies - Analyst [14]
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Okay, perfect, I've got one final question which is clearly there are a lot of businesses out there, global businesses looking to expand their presence in Latin America, How competitive is something like this and what is the answer to how you secure a deal like this against competitive pressure if there was any?
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Jens Montanana, Datatec Limited - Chief Executive [15]
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Yes, there was competitive pressure and we alluded to it in the release, actually, we said that we'd been engaged with the Company for two years, it had been a relatively, let's call it, long dance where we both were, I guess, in a way wooing each other. Obviously commercially these transactions are often competitive, but I think what made the difference here was of -- and there are other assets, there are not many but there are a handful of other assets of this class in other parts of the world.
I think what clinched it for us is the like-mindedness of our go-to-market structure, culture, management and so on, but in reality it was most probably the pure plain nature of our business versus some of our much broader-based competitors that really made the difference and, I guess, the operators and management of the Afina business want it to continue in that vein.
As you know, there are a lot of things that we don't do and we're very focused on communications, networking and security and I think that most probably was the -- obviously value, payment and how we structure the deal commercially are all important things, but I think that was key differentiator for the seller was our particular focus on the space and also the fact that there was little overlap, which was obviously a key component for the synergies and complementary aspects of the bill going forward.
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Milan Radia, Jefferies - Analyst [16]
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Makes sense, thanks a lot.
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Operator [17]
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Thank you very much. (Operator Instructions). We have a question from Franca di Silvestro from HSBC. Please go ahead.
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Franca di Silvestro, HSBC - Analyst [18]
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Morning, Jens. Jens, could I just ask, your announcement states that you are getting -- for the cash portion of the deal you are getting new loan financing. Why was that required, did you not have enough working capital financing left to finance this deal already?
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Jens Montanana, Datatec Limited - Chief Executive [19]
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Ah, that's an extension to our working -- we absolutely have significant headroom in our existing working capital lines and each time we use part of our working capital lines for acquisition financing, we need to get -- we need to have an arrangement within that facility to allocate those funds for non-working capital purposes and obviously that's so -- that's what that means in terms of that additional loan financing. It's within the context of our existing banking relationships, but obviously our facility that we deploy for working capital had different covenants, collateral, commercialization and so on.
So you can appreciate taking money out of our Company for acquisition purposes, but essentially this is part of our existing financing facilities and you'll see the interest rate that we mentioned, I think it was about 3.5%, is consistent with the asset-based funding that we have for our working capital lines.
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Franca di Silvestro, HSBC - Analyst [20]
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Excellent and can I just ask you one more question? In terms of the Spanish element of the business, is there some guidance you can give us in terms of outlook from that side, is there any concern in terms of slowdown in Europe now?
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Jens Montanana, Datatec Limited - Chief Executive [21]
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In their business or in our business or generally?
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Franca di Silvestro, HSBC - Analyst [22]
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Generally.
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Jens Montanana, Datatec Limited - Chief Executive [23]
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Yes, we haven't seen -- I think we guided in -- well, we guided -- provided guidance obviously in our full-year results in May, which was two months ago. The condition -- we're coming up with our IMS in about two weeks and right now, in real time, we haven't seen much. Obviously conditions are relatively challenging in Europe, but we haven't observed any falling off the cliff or dramatic reduction in business and we haven't really seen any differences to what we anticipated two months ago.
Obviously what's happened in the last two months is a significant degree of uncertainty has crept in and visibility around the corner perhaps has reduced, but in terms of what we're seeing on the ground in real time, we are seeing businesses continue to operate reasonably well given the degree of sovereign challenges and what you read about every day. The US has stalled a bit but we're still expecting growth out of the US this year.
In respect to Europe I think we'd laid out previously that we don't expect much growth in Europe this year and I think, looking back, that was a wise and prudent thing to telegraph to you guys as shareholders and analysts because I think we think that is going to be the case this year
And then, whilst growth has slowed a bit in Asia, moderated in South America in the sectors that we operate in, especially in this sector which is the subject of the Afina acquisition, security, data center, software virtualization, storage, things are pretty -- are holding up pretty well. So we haven't really got the -- we're certainly not indicating anything alarming and I'd expect that you would expect to see that similar comment through in a couple of weeks time.
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Franca di Silvestro, HSBC - Analyst [24]
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And sorry, just to follow on from that, does that mean that in the [profit] warranties that they'd essentially provided for the next two years, they have or have not taken into account anticipated slowdown?
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Jens Montanana, Datatec Limited - Chief Executive [25]
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Yes, absolutely, don't forget we haven't been working on the commercial aspects of this deal for two years, but we've been at it in terms of due diligence, budgeting and creating the criteria for the earn-out for this year and next year; we've been at that for six months. So in that last six months it's been an environment which is quite challenging.
So just so you know how that works going forward, the business has to meet or beat the last year's performance before they get paid incremental rake-off or earn-out for 2012 and 2013 and we have separated Brazil in that equation. Brazil is a meaningful part of their business but it's also a meaningful part of our business, so that's the one country that we have -- that will, post acquisition, immediately be flipped into our management control.
And the operators of -- the management of Afina will basically run and get measured on the Spanish speaking countries, which is basically anything in South America, excluding Brazil, and Iberia. So -- and that measurement means they have to climb above the performance of last year, so that tells you we haven't bothered -- we didn't lay that out because it's a bit complicated to explain, but essentially they have to meet or beat the performance of last year and then, based on that, they get a ratchet of that, let's call it, incremental performance.
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Franca di Silvestro, HSBC - Analyst [26]
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Excellent, thanks, Jens.
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Operator [27]
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Thank you very much. Our next question comes from Steve Minnaar from Abax Investments. Please go ahead.
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Steve Minnaar, Abax Investments - Analyst [28]
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Yes, just in terms of the actual payment, two questions. Mostly cash this time and not so much on shares; just if that means anything per se.
And secondly, if you envisage any significant integration costs getting those businesses onto your platform for logistics and support.?
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Jens Montanana, Datatec Limited - Chief Executive [29]
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In terms -- hi, Steve, in terms of cash versus shares, I think we often get asked about this and I think yourselves and other shareholders prefer that we use cash in leverage as opposed to shares and so do we. What often drives this is the degree of assets that we get relative to the purchase price. In this case we get reasonable assets, I think EUR11m, EUR12m, close to $15m, so it's 25%, 30% of the purchase price is represented by tangible assets. In that case we're more likely to use cash because obviously we've got a reasonably solid business base to marry that to. If the business was entirely goodwill, we would have been more inclined to have a high share component. So that gives you a bit of a feel, I think we've explained that before.
In terms of the platform we get, and obviously the organization has been going for 20 years, had independent systems processors and so on, the one area that we think we'll be able to slipstream in some potential longer term economies of scale and maybe little better productivity will be obviously on our systems ourselves. Now you might be aware that we're rolling an SAP system ourselves, we're at the beginning of a two-year plus program, so we will of course put these businesses, various businesses and countries into that roadmap as well. So, we have identified some countries where we might be able to move earlier for Afina and help them improve and modernize their business.
In terms of integration, operational integration, there is limited overlap. I mentioned the one country that we intend to get on with straightaway, which is Brazil. We have a very large presence in Brazil as you know and we're going to take their business and reverse into our business. In Spain the opposite is true. They have a -- Afina has a large business and we're going to take some of our operations in Spain, our non-Cisco operations and do the same in reverse and put them into their management.
So basically we've already started a program doing immediate things which are obvious and logical where it's a win-win and disruption will be minimal and then, basically, in the new countries that we have acquired, of which the most significant is Mexico by far, we're tiny in Mexico and they're significant, and the other countries, (inaudible) and Chile, Ecuador, Peru and Central America there's limited to no integration because previously we didn't have a footprint in those markets so we'll be looking to Afina's footprint and business base to add other activities, which we've alluded to -- or I alluded to earlier, such as bringing Cisco into markets where historically we've had no presence.
So we think there'll be some modest accretive benefits this year. We've mostly got the second half, we've got July and then July/August and that's our first half done and then base into our second half, so we expect in H2 we'll see modest accretive benefits, but we believe they'll be more significant next year out and beyond, as we start to ramp the additional vendors, our Cisco relationship and so on over their footprint, especially in South America.
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Steve Minnaar, Abax Investments - Analyst [30]
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Okay, thanks.
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Operator [31]
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Thank you very much. (Operator Instructions). It appears that we have no further questions. Would you like to make a final statement, sir?
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Jens Montanana, Datatec Limited - Chief Executive [32]
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Yes, well, basically just thanks very much to everyone for attending. I hope they found that useful. We'll be, as I mentioned earlier with one of the questions, we'll be providing our mid-term IMS update in about two weeks from now, which will mostly be a trading update and providing a little bit more color in terms of how we are operating in real time. And in the spectrum of this transaction, obviously we'll be going forward from immediately from today in terms of pushing the buttons in a number of areas and getting the business absorbed into the Group and transitioned over to our processes, systems and other go-to market -- market drivers in the coming months.
Anyway, thank you very much for attending and any further questions from anybody individually you can track down Rob Evans, who was on the call, and myself as you know how to. Thank you very much.
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Operator [33]
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Thank you very much. On behalf of Datatec that concludes this afternoon -- this morning's conference. Thank you for joining us and you may now disconnect your line.
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