Echelon Partners Echelon Partners analyst Rob Goff called Converge Technology Solutions Corp.’s acqusIition strategy a “master class” following its deal for three Germany-based organizations.
On Wednesday, the Toronto-based software-enabled IT & Cloud Solutions provider announced a definitive agreement to acquire Gesellschaft fr digitale Bildung (GfdB), Institut fr moderne Bildung (IfmB) and DEQSTER for approximately $33.7-million up front. It’s the company’s 32nd announced acquisition.
“CTS continues to execute on-strategy, accretive acquisitions as it builds scale,” said Mr. Goff. “Our copy/paste/accrete/repeat description continues to apply. With scale, we could see the Company secure debt financing in excess of $400-million with a comfortable debt:EBITDA of approximately 2.0 times Q422 annualized EBITDA. We look for further acquisitions including a UK platform acquisition prior to Q422 when it will likely narrow its focus to on deal integrations and organic growth. We believe completion of the next round of acquisitions will confirm CTS’s ability to establish a scaled European franchise on an accretive basis using internal financing.”
Keeping a “speculative buy” rating, he cut his target to $12 from $14.50 to “reflect current macroeconomic conditions affecting the cost of capital.” The average is $12.06.
“Where its public market value versus private market value spread narrows as its cost of equity increases, acquisition economics moderate,” he said. “Fortunately, CTS has reached a scale with the financial flexibility to finance acquisitions through internal FCF and debt where the latter represents a lower cost of capital that counters the higher cost of equity. While the market conditions remain tough, we see absolute valuation support considering our 2023 FCF at $0.89 per share values CTS shares at a compelling 14.7-per-cent FCF yield.”