BSM Technologies paid a reasonable price for Mobi, says Laurentian

Laurentian Bank Securities analyst Nick Agostino thinks BSM Technologies’ (BSM Technologies Stock Quote, Chart, News: TSXV:GPS) acquisition of Texas-based Mobi could provide some upside.

This morning, BSM announced it had acquired Mobi Corp. (throught the acquisition of its subsidiaries) for $8-million plus potential earn out payments of $17-million.

“We are continuously working to strengthen our competitive position and overall value proposition with innovative solutions that further entrench us with our customers and ultimately better serve their needs, increasing overall customer satisfaction,” said BSM CEO Aly Rahemtulla. “Through our acquisition of Mobi, we are able to move beyond collecting and reporting data toward providing our customers with solutions to optimize their daily operations. In addition, the acquisition will add predominantly software-as-a-service recurring revenue and will drive earnings before interest, taxes, depreciation and amortization margin expansion.”

Agostino characterized the deal, noting that it represents a different approach for BSM, but one that could work in the longer term.

“While BSM typically does a 2/3 upfront + 1/3 earn-out deal, these metrics are reversed for this transaction with BSM paying up to US$17M in earn-outs based on meeting 2-year targeted recurring revenue and EBITDA goals,” says the analyst. “For Mobi to achieve the full US$25M consideration, the 2-year goal include recurring revenue of US$12M (2.1x EV/Sales) and US$6M in EBITDA (50% margin; 4.2x EV/EBITDA). Approaching the upside of the earn-out would be positive for BSM’s recurring sales, EBITDA, EBITDA margins expansion and result in a multiple expansion. We note the positive trial programs noted above and BSM’s acknowledgement of a potentially healthy Mobi pipeline are encouraging. From our discussions with BSM, we understand the earn-out is based upon Mobi management’s pipeline projections, factors in 1) greenfield opportunities, 2) expansion with existing customers, including four large clients, and 3) access to BSM’s customer base, targeting the construction and services verticals initially, and government and rail longer term. Although the sales cycle is long, Mobi has a high success rate of closing. Of 25 total personnel, Mobi currently has one salesperson targeting enterprise, plus four salespeople focused solely on the Verizon channel. Immediate access to BSM’s salesforce and client base could offer sales synergies.”

In a research update to clients today, Agostino maintained his “Buy” rating and one-year price target of $1.75 on BSM Technologies.

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