Swedish mobile messaging service provider Sinch said it has signed a definitive agreement to acquire Brazilian messaging company Wavy for BRL 355 million in cash and 1.53 million new shares issued to owner Movile, and expects to complete the deal in the second half of 2020. Merger synergies are expected to reach BRL 15-20 million over the coming 24 months. Sinch has increased its credit facility by SEK 600 million for future acquisition opportunities, too.
Sinch will acquire Wavy through two legal entities, Movile Internet Movel and Wavy Global Holdings, for a total cash consideration of BRL 355 million and over 1.53 million new shares in Sinch. At the 25 March closing share price for Sinch of SEK 311 and at a krona-real exchange rate of 2.00, this corresponds to an enterprise value close to SEK 1.19 billion.
Wavy is part of Movile, a group of technology companies in Latin America, where it provides business messaging. It has used its experience in text messaging to build a prominent position in next-generation, conversational messaging, said Sinch. It is the second-largest messaging provider in Brazil and offers services in Mexico, Colombia, Peru, Chile, Argentina and Paraguay.
Sinch CEO Oscar Werner said acquiring Wavy strengthens its range and expands its presence in Latin America. Wavy has commercial agreements with more than 50 mobile operators in Latin America and currently handles more than 13 billion business messages per year. Enterprise customers using Wavy’s SMS capabilities include Caixa, CitiBanamex and business process outsourcing provider Atento.
Wavy also has a leading position in next-generation, conversational messaging over WhatsApp, said Sinch. Wavy customers in this segment include Latin American food delivery leader iFood, beauty group Avon and ticket sales specialist Ingresso Rapido. This high-margin innovation business is now seeing year-on-year growth above 200 percent, said Sinch.
In the twelve months ending 31 March 2020, Wavy is expected to record revenues of BRL 464 million, gross profit of BRL 130 million and adjusted EBITDA of BRL 48 million. In Swedish kronor terms, at a krona-real exchange rate of 2.00, this corresponds to revenues of SEK 929 million, gross profit of SEK 261 million and adjusted EBITDA of SEK 95 million. Wavy employs 260 people at nine offices in six countries. In the calendar year 2020, under current trading conditions, gross profit is expected to grow by around 15 percent in local currency.
Synergies from combining Sinch with Wavy are expected to reach SEK 30-40 million, or BRL 15-20 million, over the coming 24 months.
The purchase price paid by Sinch reflects separate valuation of Wavy’s established SMS business, and Wavy’s fast-growing Innovation business for conversational messaging through WhatsApp. The SMS business is valued at 8.8 times EV/EBITDA, before synergies, based on expected EBITDA for the twelve months to 31 March 2020.
The Innovation business, which is growing more than 200 percent year-on-year and which operates at a markedly higher gross margin, is valued at 3.4 times EV/sales based on the current run rate, taking annualised revenues for December 2019 to February 2020.
The blended EV/EBITDA multiple for the two parts corresponds to 12.5 times, or 9.1 times including estimated synergies at full run rate.
The Sinch share issue to Movile means that the number of shares in Sinch will rise by around 2.8 percent, making Movile a new key shareholder. Under lock-up undertakings, 50 percent of the shares received may not be sold for a year, and the other 50 percent not sold for eighteen months.
The transaction is expected to close in H2 2020. Sinch has agreed to pay Movile a termination fee of BRL 30 million, or SEK 60 million based on the current exchange rate, if the transaction is not completed and certain conditions are met. Handelsbanken Capital Markets is acting as financial advisor to Sinch in the transaction.
Once the transaction has closed and won regulatory approval, Wavy CEO Eduardo Henrique will become a member of the Sinch senior management team. Conselho Administrativo de Defesa Economica (CADE), the competition authority in Brazil, will have to clear the deal.
Sinch has a financial target to maintain net debt/adjusted EBITDA below 2.5 times over time. In the fourth quarter of 2019, net debt/adjusted EBITDA was 1.7 times when measured on a rolling, twelve-month basis. The recent acquisition of Chatlayer lifts this ratio rises by 0.1 times to 1.8 times. On a pro forma basis, which includes adjusted EBITDA in the acquired entity over the past twelve months, net debt/adjusted EBITDA would have been 2.5 times if the acquisition of Wavy had taken place immediately.
The Swedish company said its strategy is to expand both through organic and inorganic means and that its long-term focus on profitability and cash flow places Sinch well to continue that strategy even in times when overall macroeconomic conditions are unfavourable.
Sinch said it is continuously evaluating its capital structure and financing sources so that it can pursue acquisition opportunities and so has secured an increase in its existing credit facility of SEK 600 million for M&A, provided that it meets certain terms and conditions. After the increase, the facility will have a total commitment of SEK 1.85 billion. In addition to this credit facility, the company has overdraft facilities of SEK 250 million.
The terms and conditions agreed with the lending banks have financial covenants that allow the company to maintain its financial leverage target. The maturity is December 2022, with a possible extension of one year.
