In its SEC filing covering Q2 2018 results, Belden disclosed additional details on the pricing of its acquisition of Snell Advanced Media (SAM).
The net purchase price was $104.5 million, consisting of the assumption of $19.3 million in debt, an earnout valued at $29.3 million, and a cash amount of $55.9 million. The trailing twelve months of revenue is on the order of $110 – $115 million (assumptions below), growth was strong in the first half of 2018 (see below), though SAM was not profitable at the time of the acquisition. This then equates to a revenue multiple of approximately 0.9x trailing twelve month revenue.
For all M&A professionals and investors in the media technology sector, this is a directly comparable transaction to use as a valuation guide. Reasonable parties will argue the transaction is not representative (I suspect more sellers than buyers), but consider the transaction involved an experienced, knowledgeable, and sophisticated seller and buyer, and the acquired company was a well-known business operating at scale.
Belden’s 10Q filing states SAM (or rather the former SAM business) contributed revenue in the first six months of 2018 of $51.9 million. Since the transaction closed on February 8, 2018, there is a little over a month of SAM revenue not included in the aforementioned figure. Based on related disclosures in the filing, SAM would have contributed an additional $11.4 million had it closed on January 1, 2018. Meaning SAM generated revenue of $63.3M in the first half of the year. Those same disclosures by Belden indicated SAM had revenue of $51.8M in the first half of 2017. Therefore in the comparable year-over-year period, the SAM business grew 22% in terms of USD (Note: the original post had a calculation error indicating SAM was was down slightly year-over-year).
Some caution is needed to immediately conclude SAM has an annual revenue twice its first half because the second half tends to have larger sales volumes in the media technology sector than the first. This very point was reiterated by Belden’s CEO John Stroup on last week’s call. Notwithstanding this cyclicality, the first half results in both 2017 and 2018 suggest SAM had annual revenues in the range of $110 – $115 million (allowing for some growth in the second half of the year). Further evidence comes from SAM’s final private UK regulatory disclosure, where annual revenue in 2016 was £90.8 million ($123 million USD at 2016 average exchange rate).
According to the filing, SAM contributed a loss before taxes during the first half of the year of $9.4 million, though this included a $29.5 million restructuring charge. Referring again to Belden’s pro forma disclosures, SAM did not generate an accounting profit on a stand-alone basis during the six months of 2017. Belden is expecting to incur an additional restructuring charge in the amount of $22 million during the remainder of the 2018. These restructuring charges relate to the consolidation of facilities and support functions and are consistent with Belden management’s guidance on its recent earnings call of a $50 million investment in the integration of SAM.
In total Belden is expecting to generate $44 million of annual cost savings from integrating a $110 – $115 million revenue business. Said differently, Belden is adding around 40 percent points of operating margin to SAM through cost synergies.
The earnout portion of the purchase price is based on the earnings of the combined SAM and Grass Valley businesses. This would suggest a participation by the sellers in the cost synergies of the buyer – a tricky structure to implement and negotiate in practice.
There are several additional data points of interest on SAM in the Belden filing.
- SAM had an under-funded pension obligation of around $31 million. The liability stems from the former Quantel business (SAM, Pro-Bel had pensions with slight asset surpluses according to regulatory filings). This is entirely a legacy of the past since Quantel ceased offering its pension benefit to new employees as of 2001.
- The trademarks of the SAM business, most notable the SAM and Quantel brands, are listed in the acquired intangible assets. Belden’s purchase accounting ascribes the trademarks a value of $1.5 million and an amortization period of two years based on the anticipated useful life for the trademarks. The useful life is based “on the period of time we [Belden] expect to continue to go to market using the trademarks.” Taking this statement at face value, Belden plans to continue to use the SAM and Quantel brands for a period of two years.
- Developed technologies and customer relationships are also listed among the acquired intangible assets. The ascribed values are $32.5 million and $9.0 million respectively.
- Consistent with purchase accounting, Belden will record a Goodwill amount on its balance sheet equal to the amount purchase price exceeds the net assets of SAM. As outlined in Belden’s filing, “The goodwill is primarily attributable to expected synergies and the assembled workforce. The expected synergies for the SAM acquisition may be gained from helping broadcast and media content creators, aggregators and distributors significantly improve their effectiveness and efficiency during a period of rapid change in technology, viewer and advertiser behavior and business models.”
Belden Q2 2018 Results
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