Tucows Inc’s Aussie acquisition gets thumbs up at Cantor Fitzgerald Canada

An international acquisition by Tucows (Tucows Stock Quote, Chart, News: TSX:TC) is getting the thumbs up from Cantor Fitzgerald Canada analyst David Tomljenovic.

This morning, Tucows announced it had entered into a definitive agreement to acquire the international wholesale domain reseller channel of Australia’s first domain name registration company, Melbourne IT Ltd. The company says the pickup will add approximately 1.6-million domains to Tucows’s OpenSRS wholesale domain business.

“This acquisition represents an excellent opportunity to acquire a loyal, profitable base of resellers that have the same core needs as our existing wholesale customers,” said David Woroch, Tucows’s executive vice-president, domains. “Importantly, the scalability of our OpenSRS platform allows us to meaningfully expand our base of domains under management while adding minimally to our operating costs.”

Tomljenovic estimates the acquisition price Tucows paid for MIT was between (C) $8.0-$8.3-million and thinks the deal will be immediately accretive to Tucows market value by approximately $7.0-million. The analyst says public disclosure reveals that MIT’s business is in decline. But he says the structure of the deal Tucows made is low risk because all it has really purchased is 250 international resellers and existing customers. Tomljenovic says he will keep a close eye on the way the acquisition is integrated but thinks it’s a good deal for Tucows, in the end.

“For now, we have left our model unchanged,” says Tomljenovic. Once the deal is closed and actual statistics on customer migrations are released, as well as greater details around the post-sale integration and cost structure is provided, then we can have greater confidence about the absolute level of accretion that this delivers to Tucows. On the low end, we can see a minimum accretion of ~C$7M of enhanced market cap and the potential exists for Tucows to recognize multiples of this amount.”

In a research update to clients today, Tomljenovic maintained his “Buy” rating and one-year target price of (C) $45.00 on TC, implying a return of 64 per cent at the time of publication.