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Huge readies R275m ConnectNet buyout

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 07 Sept 2016
Huge is embarking on a period of growth and intends to grow organically and by acquisition, says Huge Group CEO James Herbst.
Huge is embarking on a period of growth and intends to grow organically and by acquisition, says Huge Group CEO James Herbst.

JSE-listed Huge Group is set to purchase 100% of ConnectNet Broadband Wireless for a total initial purchase consideration of R275 million.

ConnectNet was established in November 2004, to provide connectivity services to the card payment terminals of the commercial banks in SA by making use of, primarily, secure dual SIM connectivity over GSM data networks.

In 2014, it expanded its operations and offering with the acquisition of Sainet, a network service provider and data communications company that offers a variety of products, including Internet data services, managed network solutions, branch connectivity, hosting services, and Web site and system development.

SA remains ConnectNet's largest geographical market, although it also provides services in Botswana, Lesotho, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe.

ConnectNet competes with XLink (owned by Vodacom), FastNet (owned by Telkom) and Metacom, which is privately-owned.

Under the deal, ConnectNet has entered into a five-year loan agreement with a long-term senior debt provider. The principal amount outstanding under the loan agreement is currently R142.9 million, resulting in an enterprise value of the proposed transaction of R417.9 million.

Earlier this year, Huge Group said positive cash flows from its principal subsidiary, Huge Telecom, had positioned the group well for organic growth and growth through acquisitions.

"In the integrated report of the company for the year ended 29 February 2016, it was stated that Huge was embarking on a period of growth and that it intended to do so organically and by acquisition," says Huge Group CEO James Herbst.

"Huge Group has a strong customer base with over 13 400 active customers with more than 35 000 connections countrywide. The ConnectNet Group also has a strong customer base with over 29 000 unique customer sites located across South Africa."

The telecommunications company notes there is a clear opportunity to unlock additional growth from ConnectNet's customer base, which provides an effective channel through which to market Huge Telecom's fixed-location-voice-only telephony service.

It adds that ConnectNet has a track record of sustained growth, with the company's consolidated earnings before interest, taxation, depreciation and amortisation (EBITDA) to 29 February 2016 amounting to R68.6 million, and after tax earnings, excluding exceptional items, at R37.4 million.

"The ConnectNet Group is a predictable and cash-generative business, having paid out dividends of R23 million, R28 million and R37 million for the 2014, 2015 and 2016 financial years respectively - representing more than 40% of EBITDA in each of those years," says Huge Group in a statement.

Huge will carry out a comprehensive legal, financial and technical due diligence investigation into the business and affairs of the ConnectNet Group during the 40 business days following the fulfilment of all of the conditions precedent to the memorandum of agreement.

In terms of the memorandum of agreement, the relevant shareholders grant Huge an exclusivity period of 180 days from the date on which the memorandum of agreement becomes unconditional in which to conclude the transaction agreements. The exclusivity period will commence on the date on which the memorandum of agreement becomes unconditional.

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