Mediagrif’s acquisition of Advanced Software Concepts gets thumbs up at Laurentian

Laurentian Bank Securities analyst Nick Agostino says Mediagrif’s (Mediagrif Stock Quote, Chart, News: TSX:MDF) acquisition of Kanata-based Advanced Software Concepts is a positive.

Yesterday, Mediagrif announced it had entered into a definitive agreement to acquire all of the assets of contract life cycle management player Advanced Software Concepts Inc. for $18.5-million. Management said the move would allow Mediagrif to enter the fast-growing e-procurement space.

Agostino says the ASC acquisition is a tuck-in transaction for Mediagrif’s MERX platform that expands its the geographic reach. He broke down the ins and outs of the deal, and noted that the company might not be done on the M&A front.

“While financial details were not provided, we believe ASC’s annual revenue is under $10M, while the company paid $18.5M (including deferred revenue and expected closing adjustments),” said Agostino.”ASC is profitable and we expect the transaction to be accretive. Given its SaaS model, we estimate ASC’s EBITDA margin in the 20-30% range. When considered with its solid growth prospects, we believe Mediagrif paid 9-10x EBITDA for ASC. We estimate opex synergies of $250-500k over time which could include facility consolidation as both MERX and ASC have facilities in Ottawa. Recognition of deferred revenue should result in some margin compression over the next 12 months, as experienced in recent quarters following MDF’s acquisition of Jobboom. We estimate MDF’s post-transaction net debt/EBITDA at 1.2x, up from 0.6x at Q3/F16. Management has previously stated a comfort level of 2.5x net debt/EBITDA, implying capacity exists for further M&A. With an $80M acquisition line (>$45M outstanding post deal), we expect follow-on transactions to be a further catalyst for the shares.”

In a research update to clients today, Agostino maintained his “Buy” recommendation and one-year price target of $21.00 on Mediagrif.