Megabuyte

SmartStream confirms sale to DIFC

A press release has just been issued confirming the sale of SmartStream to the Dubai International Financial Centre Investments for £200m. You can read our earlier post on the rumours of this story here. DIFC owns the Dubai Stock Exchange and its subsidiary DIFC Investment manages a range of subsidiary companies. In the statement, DIFC says that it intends to use SmartStream technology to create a hosted information and trade process service.

Our View

DIFC does not look like the natural home for SmartStream but, at the end of the day, TA will have sold the business to the highest bidder. The idea of an exchange owning a piece of software that aims to make reconciliation easier across multiple exchanges seems strange to us and we would argue that the deal is likely to limit SmartStream's potential market in the medium to long term.

SmartStream set to sell out to DIFC for £200m

Following its failed IPO, The Telegraph reports that financial software company SmartStream is poised to announce its acquisition by The Dubai International Financial Centre, which owns Dubai's stock exchange. It is not surprising to see SmartStream on the blocks following the failure of its IPO - companies often run a dual track process where they talk to trade buyers at the same time as going through the IPO process in case it doesn't get away. Discussions with DIFC may have been ongoing even before the IPO was pulled as a plan B. The valuation is interesting standing at a significant discount to the starting range for the IPO, but at a premium to the price at the end of the process which was rumoured to be as low as £150m. SmartStream's majority shareholder TA Associates may have felt that, having gone through the trauma of the IPO, it was committed to an exit. If the deal does announce in the next day or so, TA can focus its attentions on the other current transaction in its portfolio - the IPO of Sophos in which it owns 20%.

McAfee Safeboot buy casts further doubt on European IPO market

We were interested to see the acquisition of Dutch security software company Safeboot by NASDAQ listed McAfee yesterday not so much for the deal itself but for what it says about the European IPO market. Private equity backed Safeboot provides full disk encryption systems for mobile data protection on laptops and PDAs and had only recently announced it's intention to undertake an IPO on Euronext.

Our View

The valuation paid for Safeboot at the $350m price tag was reported to be 28x current year earnings, so perhaps it wasn't a failed IPO so much as a more attractive offer from McAfee. Nevertheless, following on from the indefinite postponement of the SmartStream IPO, this news add further doubts to the attractiveness of the European IPO market. Hosting company Telecity is currently undergoing its IPO  and early rumours are that there is a generally positive view about the company but some resistance to the £400m+ price tag sought. Enterprise virus and anti-spam software vendor Sophos is also rumoured to by coming to the market shortly and will be particularly interested in the Safeboot news as it operates broadly in the same space. What seems increasingly clear to us is that, if Telecity doesn't get away, then the IPO market will effectively be shut.

UK Technews 2.10.07

Better late than never, a quick round up of the day's news. First, Mediasurface shares are deep in the red after a bad profit warning - the shares are down over 50% (see separate post). Phoenix IT is also under pressure today following its trading update yesterday - the shares are down 6.5% to 350p. On a more positive note, Blinkx has said that current trading is ahead of expectations and that results for the first half to September will beat the top end of expectations. The shares are up 16% to 34p.

The SmartStream IPO bandwagon came to a sad end yesterday as the company announced that it had delayed its IPO indefinitely. This follows news on Friday that the company was going to give it a couple more days to see if they could fill the book. However, according to the FT, the company's hand was forced by the SEC which was unhappy about the IPO being finalised so close to the SIBOS trade show where SmartStream management would be making presentations. Even without that though, news of massive losses at Citigroup and UBS resulting from sub prime mortgages may well have been the last straw anyway. It's always a shame when IPOs don't get away but it will be interesting to see whether TA Associates, who have only owned SmartStream for a year or so, stick with it or look for a trade exit. We watch with interest to see whether Telecity gets a warmer reception and whether others that are rumoured to be trying for an IPO, such as Sophos, carry on with their plans.

We've just spotted that Anite has replaced UBS as its broker with JPMorgan Cazenove and Landsbanki as joint brokers.

We're at the Future of Web Apps (FOWA) conference tomorrow which should be really interesting. At a time when Web 2.0 is attracting so much attention, this event brings together many of the top people making it happen as well as some very funky start ups.

UK Technews 1.10.07

It was an interesting day of Friday in relation to SmartStream after we posted a story on the delayed IPO. First of all, many thanks to Richard Holway for the credit on his hotviews blog. On a less positive note, we were a bit miffed about being misquoted in the FT as saying that Fidessa is a competitor to SmartStream when actually we said that it was a comparator. During the day the quote was picked up on Elton Cane's blog on Finextra - with some pretty harsh words attached - you can read the post here. Still, they do say that no publicity is bad publicity. We didn't spot any further press comment on SmartStream or Telecity over the weekend.

With results season pretty much over, we look forward to some period end trading updates from March and September year end companies. Phoenix IT has started the ball rolling this morning with a period end trading update for the six months to September. Although there trading at Phoenix is said to be in line with expectations, the statement also notes that the integration of ICM is likely to cause some disruption. It is difficult to know whether this statement is simply noting that the integration of ICM will be a significant task for the group or whether it is preparing the market some financial impact of the integration in Phoenix's fiscal H2. The shares have opened down a shade at 382p.

Of the other companies with September period ends, we will be particularly interested to hear from Detica, whose shares have dropped by around a quarter over the summer. The interim management statement in August noted integration difficulties with DFI in the US, so we wait to see what progress has been made there. Also, it will also be interesting to see if the turmoil in the credit markets is having an impact on Detica's financial services practice which now represents around 25% of revenues. Detica didn't issue an interim period end trading update last year so we may need to wait until the results in November to find out more. Other companies with September period ends include, Civica (trading update 18 October last year), Intec Telecom Systems (no trading update last year until November) and The Innovation Group (trading update expected in late October).

On the M&A front, BT has made further advances in the IT sector with the acquisition of IT reseller Lynx Technology for an undisclosed sum. The acquisition of Lynx, which has revenues of just under £50m, follows the recent purchase of Basilica and sees BT significantly raising its profile in the SME IT solutions market.

Please note that there will be no morning update tomorrow.

SmartStream delays listing

The main news this morning is that SmartStream has delayed its IPO as they struggle to gather sufficient demand even after cutting the price by over a third. It looks like Citi is looking for a few more days to fill the book.

Our View

First of all we need to correct a misquote in the FT article this morning - we said that fidessa was the nearest comparator to Smartstream, not competitor as got printed. fidessa is clearly not a competitor of SmartStream but it does operate in broadly the same market space. That said, we do believe that with a price at around £175m, which is where we think it is being pitched, SmartStream is looking pretty good value. Given the figures that we believe are in the market for the year to June 2008, this would put SmartStream on a current year EV/EBITDA of under 10x which would seem to leave room for a re-rating as the company gains momentum as a listed company.

SmartStream cuts its IPO price ambitions

In a piece in today's Independent , SmartStream is said to be cutting it's IPO price ambitions from £250m-£300m to £175m-£200m. The reason given is market volatility resulting from the credit crunch fall out.

Our View

We had heard in the market that the price had been cut to £200m - £240m but a cut of this magnitude is a surprise. It does however put the company on around 10-11x forward EV/EBITDA which is starting to look good value.  We'll post more on the company after the analyst meeting on Friday or before if we are able to get our hands on a pathfinder.

UK Technews 21.8.07 update

A couple of bits of follow up from this morning. We only managed to pick up half of the Anite story on this morning's post. In addition to Chris Humphrey, Chairman Clay Brendish (72,000) and CEO Steve Rowley (100,000) also bought shares in the company yesterday. After a couple of days in the red, the shares stabilised today and ended up 1p to 70p. The share purchases seem to suggest that management doesn't share the market's view that this week's trading update indicated some worrying trends in the business.

The real casualty of the day has been Alphameric which ended the day down 60% to 12p on its trading update this morning. Significant losses, litigation and a weak balance sheet is a pretty lethal combination. The share price seems suggests that some kind of rescue funding is in the offing.

Looking at next week we have Gresham Computing reporting interims on Monday, Servicepower on Tuesday and AT Communications on Thursday.

SmartStream, which is currently in the middle of its IPO process, is talking to analysts in more detail about the company next week. Press comment following our last post on the company suggested that a valuation of £250m-£300m was the target - not the £400m plus that the FT had previously suggested. Given the state of the markets, it will be very interesting to see how they are getting on. There are a number of IPO hopefuls waiting in the wings watching SmartStream's progress with interest.

Smartstream blinks first

Straight through processing software company Smartstream has broken cover as the first of 2-3 significant IPOs in the sector slated for Q4. Smartstream put out a press release today saying that it is seeking an IPO on the main market and we understand that research is out this morning from the lead bank (Citi) and co-lead (Landsbanki (the Bridgewell part)). Smartstream supplies transaction automation software primarily into the wholesale banking market and is the market leader in the space. Revenue for the year to June 2007 was £46.5m, up 13% on the previous year and EBITDA margins are an impressive 30% giving £13.9m in 2006/07.

Smartstream is the first to go public in what is expected to be a busy time for IPOs coming up to Christmas. TelecityRedbus and a software company selling into the media sector (I dare not mention the name for fear of serious reprisals) are both expected in H2. Security software and appliance company Sophos (where Paul Smolinski of The Innovation Group recently started) is also rumoured to be coming to the market, but we've heard conflicting stories about whether it is going to London or New York.

Our View

It is great to see what appears to be a high quality business like Smartstream coming to the market. Our only concern is that, with a plethora of advisers and a large US private equity house (TA Associates) behind it, it doesn't t fall into the trap of so many before it, most notably Micro Focus, and overprice it. A recent article in the FT suggested that Smartstream was one of a number of companies coming to the market that could command a value of £400m-£600m. On the financial information given in the release today, we sincerely hope that they don't try to get anywhere near this kind of value for Smartstream. If the company was to grow EBITDA by 20% in the current year, the lower end of the range (£400m) would put it on 24x forward EBITDA. Overcook the valuation at IPO, even for a fundamentally strong company (see Micro Focus) and you are storing up serious problems for the future. IPO a company at a fair price and allow it to grow into its multiple (see Detica, Fidessa and Aveva) and you have the recipe for a long and happy life as a listed company. Here endeth the lesson.