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Linc.net’s Acquisition of Muller and Pribyl (M&P) and C&B Associates (C&B)
Linc.net, Inc.
6161 Blue Lagoon Road, Suite 300
Miami, Florida 33126
On December 21, 1999, Linc.net made its first two acquisitions out of a total of 11.
We have tracked the first two acquisitions in this "Roll-up" as one sale and individually, giving us a clear indication of what initial multiples were paid based on the $72.2 million price.
It appears, based on the S-1 registration, that Linc.net’s main objective was to become the leading national provider of end-to-end network infrastructure services to telecommunications, Internet, and cable television providers. Their strategy in bringing all these similar companies together from various sections of the United States was to:
INTRODUCTION
Linc.net is a full-service provider of high-quality network infrastructure services. Linc.net engineers, installs, and maintains electronic, digital subscriber lines (DSLs), and optical telecommunications equipment in the central offices of major network providers. They also perform engineering services, program management, and installation of fiber optic and other cabling and related equipment for wireless and wireline telecommunications providers. The company offers a full range of services, either bundled or separately, under the Linc.net national brand.
INDUSTRY DESCRIPTION
Their customer base includes incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), rural exchange carriers, telecommunications equipment manufacturers, Internet providers, cable television operators, long distance carriers, wireless phone companies, co-location facilities providers, and public and private energy companies. Assuming the completion of the Intercon acquisitions on September 6, 2000, Linc.net had approximately 3,700 employees, including over 400 network engineers and over 700 network technicians. The following factors will lead to a continuing increase in demand for Linc.net services:
To allow customers to deliver their services reliably and cost effectively, Linc.net provides:
First Acquisition - Muller & Pribyl (M&P)
One of Linc.net’s acquisitions is Muller & Pribyl (M&P). M&P Utilities, Inc. and Muller & Pribyl Utilities, Inc. are located in Hamel, Minnesota. These companies provide network infrastructure installation services to telecommunications, Internet, cable TV providers and, to a lesser extent, energy companies. Services are performed primarily under fixed price per unit produced contracts. In 1999 the company had $43,916,000 in revenues with profit of $9.4 million before taxes and other income and expenses.
Second Acquisition - C&B Associates Ltd. (C&B)
We also reviewed Linc.net’s acquisition of C&B Associates. This company is located in Mineral Wells, Texas and it provides network installation services primarily to the telecommunications industry. In 1999 C&B had almost $32 million in revenue with profits of almost $5.4 million before taxes and other transactional costs.
These two companies are very similar in nature and the purchase of these two companies in effect ensures Linc.net’s control of the Midwest from Minnesota to Texas for these types of services.
| Salient Data - Combined Sale of M&P and C&B | |||
| Date of Sale | December 21, 1999 | M&P | C&B |
| Purchase Price | Combined $79,200 million | $43,000 million | $36.2 million |
| Terms | Cash Sale | Cash Sale | Cash Sale |
| Multiple of Revenue | 1.04% | 98.00% | 1.13% |
| Multiple of Income from Operations | 5.3 | 4.6 | 6.7 |
| Multiple of Net Income Before Tax | 8.5 | 8.6 | 8.3 |
| Multiple of Book | 4.4 | 3.5 | 5.0 |
Comments: You will note that M&P had a 21.5 percent income from operations margin while C&B had a lesser margin of 16.8 percent, yet Linc.net paid higher multiples for C&B, 6.7 compared to 4.6 for M&P. Why? First, M&P had transaction costs of $4.5 million, mostly bonuses to principals, compared to $956 for C&B, which accounts for all the variance in price. When the transaction costs are taken into consideration, the multiples are virtually the same.
On a combined basis, the average multiple of revenue was 1.04 with multiple of earnings before transaction cost of 5.3 and a multiple of book of 4.4. The combined entity before tax had a 19.5 percent profit margin. Both companies also grew significantly in the last several years. The questions that all investors must ask themselves before investing in a roll-up entity are: How much more can they improve on these two well-run companies? And once rolled-up, how much more of the market can they capture?
| Combined Income Statement from January 1, 1999 - December 21, 1999 (amounts in thousands) | M&P | C&B | Combined | % |
| Net Revenue | $43,916 | $31,964 | $75,880 | 100.0 |
| Cost of Sales | $32,701 | $23,409 | $56,110 | 74.0 |
| Gross Profit | $11,215 | $8,555 | $19,770 | 26.0 |
| General & Administrative Expenses | $1,781 | $3,180 | $4,961 | 6.5 |
| Income from Operations | $9,434 | $5,375 | $14,809 | 19.5% |
| Combined Balance Sheet as of December 21, 1999 (amounts in thousands) | M&P | C&B | Combined |
| Assets | |||
| Cash | $970 | $2,064 | $3,034 |
| Accounts Receivable | $13,369 | $6,665 | $20,034 |
| Unbilled Revenue | $516 | $157 | $673 |
| Inventory | $149 | $230 | $379 |
| Prepaids | $109 | $496 | $605 |
| Total Assets | $15,113 | $9,612 | $24,725 |
| Fixed Assets/Net | $6,716 | $3,490 | $10,206 |
| Total Assets | $21,829 | $13,102 | $34,931 |
| Liabilities | |||
| Total Current Liabilities | $10,703 | $4,465 | $15,168 |
| Notes Payable Less Current Portion | $463 | $1,324 | $1,787 |
| Partnership/Shareholder Equity | $10,663 | $7,313 | $17,976 |
| Total Liabilities & Shareholder or Partnership Equity | $21,829 | $13,102 | $34,931 |
Shenehon Company
88 South 10th Street, Suite 400
Minneapolis, Minnesota 55403
Phone: 612.333.6533 / Fax: 612.344.1635
ValuationSpecialist@shenehon.com
