6pm seeks financing to fund strategic changes

Financial Article 392 by Edward Rizzo - Jul 16, 2015

The announcement made on 8 June by 6pm Holdings plc confirming that it had submitted an application to the Listing Authority to issue a new €13 million bond may have caught some investors and market participants by surprise.

It is true that almost two months earlier 6pm had announced that it had initiated formal discussions to acquire Blithe Computer Systems Limited, a UK private company that specializes in the provision of information systems and software for the health care sector. However, the amount of funding at €13 million was the real surprise given the size of 6pm’s balance sheet and the €5.8 million required to purchase the UK company. Hence, over the past few weeks between the initial announcement of the acquisition of Blithe on 10 June and the publication of the prospectus on 14 July, market participants may have questioned the requirement of the additional €7.2 million being raised by 6pm.

6pm’s reporting currency is in Sterling given that historically the UK was the main market for the company and 70% of revenue generated is in British Pounds. The total amount of shareholders’ funds shown on the company’s balance sheet as at 31 December 2014 amounted to GBP5.7 million, equivalent to circa €8.1 million. The amount being raised is therefore larger than the current level of shareholders’ funds depicting the significant increase in leverage of 6pm going forward. In fact, the gearing ratio will increase to 55.5% given the total net debt estimated at GBP7.6 million and shareholders’ funds of GBP6.1 million as at 31 December 2015.

The prospectus published earlier this week provides the information on the reasons for the bond issue and use of proceeds. Apart from the acquisition of the UK company, 6pm also intends to utilize €3.2 million to repay part of its existing bank facilities with HSBC Bank Malta plc and Bank of Valletta plc; €2.7 million will be used to enhance its software products while the balance of €0.8 million after issuance costs will be available for working capital purposes.

“Business acquisitions contain a number of risks as well as possible opportunities arising from cross-selling and other synergies.”

The 6pm Group is principally involved in the provision of IT products and services to the health sector, primarily to Trusts within the UK’s National Health Service. The principal health products are split into 3 categories as follows: (i) logistics management consisting of operational support to optimize service standards and improve efficiencies; (ii) information management consisting of the use of data analysis tools to assist business decision processes and (iii) clinical management consisting of health applications.

The Intelligent File and Inventory Tracking product, branded iFIT, is the Group’s flagship product contributing 36% of total revenue from the health sector. The CareSolutions Data Warehouse falling under the information management category contributed 10% of overall revenue within the health sector while the clinical management applications to support HIV, stroke and dementia contributed less than 10% of health sector revenue.

The €2.7 million investment in new products is a positive and bold initiative. However, it is difficult to judge when and if this investment will pay off. Unfortunately, no additional information is available in the Prospectus on the extent of the expected future revenues and contributions over the next two years that will be derived from this investment.

6pm’s shareholders and financial analysts would have also looked for additional information on Blithe Computer Systems Limited since the company announcements over recent weeks only provided a brief overview of the company and its historical financial situation.

Blithe specialises in the provision of systems and solutions for the management of Electronic Patient Records (EPR) within the health sector with a focus on sexual health and substance misuse. Blithe’s two solutions are currently being used by more than 10,000 healthcare professionals across more than 700 locations throughout the United Kingdom. However, despite the large number of users, the Prospectus revealed that between 2012 and 2014, Blithe’s revenue declined from GBP2.3 million to GBP2.1 million and the EBITDA shrunk from GBP0.8 million to GBP0.27 million. Unfortunately the reasons behind the significant decline in operational performance were not provided in the Prospectus. On the other hand, 6pm stands to benefit from Blithe’s access to the NHS network which enables any third party provider on this network to provide support and maintenance from any remote location. As a result, this should lead to reduced costs going forward.

Another important detail that emerges from the Prospectus is that during the past few weeks, 6pm decided to close the Compunet retail operation. This is surprising given that 6pm acquired Compunet only in 2011 for €1 million and it had launched a sizeable rights issue at the time to fund a number of acquisitions including Compunet and also to repay certain bank facilities. The purchase of Compunet was conducted 4 years ago following a change in business strategy of 6pm as it aimed to increase penetration across the local market by acquiring a number of IT companies in view of the challenges prevailing in the UK NHS market at the time. 6pm’s CEO had explained in the media that the 6pm Group had already earmarked 10 firms under its planned consolidation programme of the local IT industry. The closure of the Compunet retail outlet (although the Prospectus indicates that 6pm will continue to supply technological infrastructure and devices to its clients) is disappointing for shareholders and although this was not a major contributor to the Group’s financial performance, it still ought to have been communicated to the market via an appropriate company announcement.

The change in strategy after such a brief period is also surprising but this shows the danger and risks associated with acquisitions. Business acquisitions contain a number of risks as well as possible opportunities arising from cross-selling and other synergies. 6pm aims to achieve such benefits from the acquisition of the UK company Blithe. However the Prospectus does not provide details on how 6pm aims to turnaround Blithe’s financial performance.

Despite the lack of success in expansion across the local market, 6pm still performed very positively over the past three years. EBITDA grew from GBP0.82 million in 2012 to GBP1.47 million in 2014 mainly through the success of iFIT in the UK. Shareholders were rewarded accordingly through growing dividend payments in each of the last three years.

6pm Holdings plc - Financial Highliights

The Prospectus reveals that during the current financial year to 31 December 2015, EBITDA is estimated to rise by 19% to GBP1.7 million and by a further 69% in 2016 to GBP2.9 million. According to the Financial Analysis Summary appended to the Prospectus, the significant improvement in operational performance is expected to materialize from the UK market apart from the consolidation of Blithe from the second half of 2015.

The 6pm bonds at a coupon of 5.1% per annum are reserved for 6pm shareholders and the Prospectus indicates that in determining the allocation policy, “the Issuer shall take into consideration the number of shares held by such shareholders. In this respect, 6pm’s largest shareholder is ‘Charts Investment Management Service Limited on behalf of clients’ with 32%, followed by Ivan Bartolo and Nazzareno Vassallo at 18.6% each. These 3 shareholders are likely to have the financial resources to possibly subscribe to a large portion of the bonds available. As such, small shareholders may therefore only be allotted fractional amounts while other investors are unlikely to have the opportunity to apply for any of these bonds via the intermediaries offers. Hopefully, other bonds, which will be available for subscription to the market at large, will be available in the months ahead.

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