On 7th August 2023, GO plc and its subsidiary BMIT Technologies plc both announced that they entered into an Asset Purchase Agreement for the potential assignment and transfer of certain lease rights and obligations currently enjoyed by GO as well as the passive infrastructure used for hosting telecommunications equipment.

Following the detailed company announcement in early August, BMIT issued a Shareholder Circular ahead of next week’s Extraordinary General Meeting scheduled for Monday 25th September and published an explanatory presentation to highlight the salient features of the transaction and provide a graphical overview on the financial impact to BMIT over the coming years.

In essence, BMIT will be acquiring a network of cellular towers from GO which currently amounts to circa 280 across the Maltese Islands for a total consideration of circa €47 million. BMIT will henceforth become the new tenant of the underlying leases and will provide the passive infrastructure services to GO as its anchor client on the sites for an initial period of 30 years with an option for additional five-year renewable periods.

These cellular towers are placed on rooftops or grounds of third party commercial or residential premises and are used by GO to install active cellular equipment necessary for the provision of its mobile telephony services. The annual service fee to be paid by GO to BMIT has an agreed annual increment which will translate into a highly visible and growing revenue stream for BMIT.

In terms of the agreement between the two companies, GO is also required to deliver an additional 30 sites to BMIT by the end of 2030.

This major investment by BMIT will be financed in two ways. The company is finalising a bank loan of €30 million with a local credit institution. Meanwhile, GO is providing a €15 million loan to BMIT with an interest rate of three per cent per annum for an initial 5-year term and repayable in one single repayment on maturity. BMIT may prepay this loan in whole or in part at any time without penalty in the event that it may wish to refinance this debt through other sources in due course.

The Shareholder Circular provides ‘pro forma’ financial information based on a hypothetical scenario assuming that the proposed transaction was implemented with effect from 1 January 2022 although additional details on the financial impact were presented in the presentation to financial analysts on 13th September which is also available online.

The transaction increases BMIT’s total assets by €43 million, principally relating to the recognition of the Master Service Agreement as an intangible asset. Meanwhile, BMIT’s net debt increases by €46.6 million, reflecting the additional borrowings and cash outflow relating to the settlement of the consideration due to GO. The Pro forma Consolidated Statement of Comprehensive Income shows that in the first year, the impact of the transaction would translate in additional revenue of just over €4 million, an EBITDA of €2.5 million and finance costs of €1.5 million. In this respect, BMIT explained that while this will result in a net loss before tax of around €0.76 million in the first year, the reported losses are expected to decrease year-on-year as EBITDA margins improve and the company starts making capital repayments on its borrowings which will result in a reduction in finance costs.

In fact, the revenue due to BMIT from this transaction will increase by 9 per cent until 2027 and 19 per cent until 2030 while EBITDA will surpass €3 million by 2026. Effectively, BMIT’s combined EBITDA will rise from the 2022 actual figure of €10.7 million to circa €14 million by 2027 representing a growth rate of 30 per cent.

In the meeting with financial analysts on 13 September, BMIT’s CEO Ing Chris Sammut claimed that as a result of the major acquisition, BMIT will become “a more attractive and diversified listed technology company with a strong infrastructure profile including towers and data centres”.

BMIT’s CEO explained that over recent years, the company had sought to expand by acquiring other companies both locally as well as internationally. However, the opportunities that were analysed had low margins compared to the present overall EBITDA margin of just over 40 per cent of BMIT in 2022 and an expected EBITDA margin of 70 per cent from the towers business. In his view, the acquisition of the cellular towers from GO enables BMIT to carry out a significant diversification strategy, which is important in view of market shifts in its core data centre services. In fact, the Shareholder Circular explains that “as more businesses migrate their operations to the cloud and rely on third-party service providers, the demand for traditional data centre and co-location services is being impacted”. BMIT’s CEO reported that despite the shift in technology, it maintains a very high utilisation rate of circa 85 per cent of its data centre capacity.

The benefit for BMIT is that this transaction will create an additional income stream with predictable cash flows and low risk through the 30-year contract with GO as an anchor tenant. The transaction also offers BMIT further opportunities such as enhancing the co-location business with respect to the passive infrastructure used for hosting telecommunications equipment and other opportunities relating to under-utilised roof spaces across the Maltese Islands. More importantly for minority shareholders is that the transaction will not impact the sustainability of future dividend payments since GO, being BMIT’s majority shareholder, is providing an undertaking to take up additional shares in any scrip dividend option offered by BMIT in the coming years up to a maximum amount of €15 million. During the meeting with financial analysts, BMIT’s CEO explained that the company’s cash flow will remain strong in the coming years and in fact the overall leverage of the company will be very manageable with a net debt to EBITDA multiple improving from 3 times in 2024 to below two times in 2027 and an interest cover of above eight times from 2024 onwards.

The upcoming scrip dividend policy can also be of benefit to other shareholders who do not prioritise cash dividends and may elect to re-invest upcoming dividends into BMIT shares. The commitment by GO to take up additional shares in the future should be viewed as a strong sign of confidence in BMIT by its major shareholder.

On its part, GO will be monetising another asset which was not reflected in its financial statements. Transactions of this nature were also conducted by other local and international telecom providers as they sold off their tower assets to third party specialists. Over the past several years, GO performed other similar transactions (such as the spin-off of Malta Properties Company plc and the sale of a 49 per cent stake in BMIT) which enhanced overall shareholder value. An interesting aspect would be on the utilisation of the additional liquidity being available to GO especially within the Cypriot market where its subsidiary Cablenet is registering strong growth and increasing its market share.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers)

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