Neil Ackroyd

Welcome to Corporate Finance Television. We are here today talking to Chess Telecom and Richard Btesh about their series of acquisitions last year and their future acquisition criteria for years coming. Richard welcome.

Richard Btesh

Thank you

Neil Ackroyd

Richard, why don’t you tell me a bit about Chess, I understand that you have done a dozen or so deals in the last year and continue to be quite acquisitive at about a deal a month. Why don’t you tell me about some of those deals and what your interest is and what your strategy behind doing acquisitions is.

Richard Btesh

Yes sure. Whilst Chess has been around since 1993, it has been predominately in Telecoms since 1996 and there are about 1000 telecom resellers in the UK. Some of them are very small companies and some of them are Chess size and some of them are of course the biggest of them all British Telecoms. Chess is a business to business provider so we don’t provide retailer consumer customers and we have got about 20,000 business customers. What you have got here really in the telecom resellers market in the UK is runs along the lines of a classic Harvard Business School consolidation model and nearly all of those 1000 businesses are for sale now sooner or later. Chess is in the mid-sized space since 2004, when I joined Chess, we have been acquiring those businesses. We have probably done about 50 deals in the last 5 or 6 years and we run at 9 or 10 deals a year. We have got an integration team who can take on about 1 acquisition a month.

Neil Ackroyd

Richard, what would you say is your typical value of deal? What are the criteria that would make a deal attractive to you?

Richard Btesh

Our deals are typically fairly small and by small I mean the £0.5m to £3or4m turnover companies but there is no reason why we can’t take somebody on that is say £5-10m. Last year I raised a fund for £21m from Barclays Bank and we’ve got great support from Barclays and there is further funding available if somebody bigger comes along. It is about being the right fit for this business.

Neil Ackroyd

And what does that right fit look like in terms of RPOO? and those interesting terms for telecom businesses.

Richard Btesh

I will try and keep off those. In terms of the industry, like you have got, you’ve got your fixed line, you’ve got your calls, you’ve got mobiles, you’ve got broadband and that if you like is the core business of Chess but with Cloud the possibilities are much wider and greater than that and the extent to which you need the technical support and understanding of the telecoms industry means that a company the size of Chess has got the expertise in all those areas. So predominately the type of business that we would look at, the type of core business if you like, would be providing those services of fixed line, calls and services, broadband, data, mobile and then you would add to that maintenance and other opportunities that are related to the telecoms and the Cloud because this whole date space is becoming much more interesting.

Neil Ackroyd

Cloud is massive obviously and is causing huge shockwaves in the computer services arena and certainly as telecoms move to a ? and things like that it’s changing everything I’d say.
In terms of annual gross profit because I think that is a measure that is used quite strongly in your industry, what would be the attractive ranges in terms of annual gross profit for a potential target business.

Richard Btesh

Obviously we look at gross margin, we look at EBITDA and as you have rightly pointed out we tend to value the smaller deals, the asset type deals , on gross margin whereas if you were buying a larger corporate you would be looking at a multiple of EBITDA. They can vary a lot. Typically we are looking for business with a gross margin of between £50k - £150k a month, so £0.5m-£2m a year. If we are able with our operation to combine an operation into ours with only modest additional expenditure their gross margin drops down to our EBITDA and that is the secret of the successful model but you have got to be of a size to get those economies of scale through.

Neil Ackroyd

Are there any interesting deals that you did last year or any lessons that you learnt last year that you wish to transmit to our users?

Richard Btesh

Well we have done 50 deals and every deal is slightly different. You think you know it all and you learn inevitably on every deal. But predominately on these smaller types of deals, the £0.5m to £5m plus type, you are typically deal with vendors that may or may not be serial entrepreneurs and therefore they might have only sold a business once or twice before. They have got a pride probably in running their business. They probably know most of the customers themselves and what they have got to believe and understand is how the Chess integration machine is not so vast that it won’t accommodate their customers and it can serve their customers in the way in which they have been able to and I think that is the key in terms of making the Chess model successful. And obviously with that track record now, we’ve got the points of reference and we are able to do that

Neil Ackroyd

One of your key differentiates for yourself, is that you are able to reference from people that have sold to you in the past that actually the customers were looked after and the business was successful going forward.

Richard Btesh

Probably one of our most successful deals was from somebody that we had bought from 3 times. They built a base – they sold it – they’ve rebuilt it with us supporting them – sold it – and then finally last September they decided to exit from telecoms completely and at each time we have been able to look at their base and work with them and support them in the meantime and give the entrepreneur a capital release.

Neil Ackroyd

And in this model, in the buying telecom resellers how long does it typically take you to do a deal from 1st talking to a company and deciding they are interested to legal completion and popping champagne corks.

Richard Btesh

Believe it or not, we can do a deal in an afternoon. It is the quickest deal we have done, where we had a vendor that was in a forced sale situation and we literally pulled out all of his information. We saw that we were able to integrate it and we knew who his carriers were, who his providers were. We ran through the process, he was here and he met the team. We got out the legal agreement which for us is a very straight forward document particularly in terms of these smaller transactions. We said what we’d do. He already knew us by reputation which was important and we literally signed within 3 or 4 hours.
I would like to sign a deal over a week. These are fairly straight forward deals. Obviously these are asset deals where we are literally buying the customer contracts. On the bigger type of deals where they are share deals inevitable that takes a period of 1 month or 2 months maybe as you do have to go through the due diligence processes from our position in terms of financial as well as commercial and inevitably the legal through the S&P agreement.

Neil Ackroyd

Again, with in these buying or selling telecom resellers, what would be the typical customer size? Is there a typical customer range in terms of average spend per user.

Richard Btesh

You mentioned that previously the RPOO. A number of our competitors have very low range RPOOs of £10, £20, £30. That for us would be very small. Particularly we like small business, so we are looking at businesses that we are buying typically having an RPOO of £300, £400, £500. That is as an average. So inevitably you have got a buyers debt. We’ll buy customers that are spending anything between £1k-£10k per month. Typically if they are spending more than £10k a month they are not so likely to be with Chess although we do have a number of customers spending more than £10k a month and we are able to service them. A typical customer is an SME.

Neil Ackroyd

Is there anything that you would want to say that people may find interesting if they are thinking about selling their business and thinking about Chess, I guess.

Richard Btesh

To emphasise that Chess is the market leader in the space of the small telecoms businesses. Obviously telecoms encompasses a fairly wide arena but I think that the services mentioned are already fairly clear. That we have got the bank’s support. We have already got the funding of the £21m from Barclays. That we’ve got a lot more there available and that we enjoy what we are doing. You have got to enjoy what you are doing every day. It is good fun. In Alderley Edge, there is a team of 150 here and I’d end up by saying that the key to us is customer service because it is all about the customer. You can have an integration machine and all the billing and everything else but unless you truly put the customer at the centre of everything you do and great customer service you can not grow a business in this sector. That more than anything else is the key to a successful telecoms business.

Neil Ackroyd

I think that I would certainly agree with you on that and a lot of guys that we have spoken to you and dealt with in this arena are sales people. It is a bit of trend that the people who set up these telecom resellers and look to sell them are essentially sales people.
In summary, Chess are out there. You are the market leader in terms of deal numbers and the amount of businesses that you are consolidating and in terms of telecoms resellers and buying and selling telecom resellers, you have got the funding from Barclays, the money is there. You are keen to do deals and you are keen to and able to reference your previous success with people that you have done deals with in the past which is a big thing. Do you think I have missed anything out there?

Richard Btesh

No I couldn’t have put it better myself.

Neil Ackroyd

Super. Richard it has been a pleasure talking to you and I look forward to chatting with you after you complete another deal.