7digital: A Step Change With 24-7 Deal

7Digital Group PLC (LON:7DIG)'s acquisition of 24-7 consolidates its position as the largest provider of B2B music services in Europe and adds £18m of secured revenues to its pipeline. Accelerated platform integration means EBITDA profitability will be pushed out to FY18, when management expects the deal to be significantly earnings enhancing and the group to be both profitable and cash flow positive.

24-7 acquisition adds a significant new client

7digital has completed the acquisition of Copenhagen’s 24-7 from MediaMarktSaturn (MMS), Europe’s leading consumer electronic retailer. The final deal values 24-7 at £2.2m through the issue of 23.1m new shares and £0.9m acquired cash which is refundable post completion. After issue, MMS will become a 12.7% shareholder and significant customer of the enlarged group, which will continue to service its Europe-wide Juke! service for a contract value of £11m over three years, as well as additional development work worth £6m (over two years). The acquisition also brings contracts with other customers, including Danish telco TDC with an annualised value of £2.7m.

Step change in scale; earnings enhancing by FY18

Management estimates that the acquisition will increase its revenues by £5m in FY17 and by over £8m in FY18, more than doubling licence revenues from those reported in FY16. Although the accelerated integration of the platform is likely to mean that 7digital remains loss making at the EBITDA level in FY17 (versus its previous expectation of becoming profitable at the EBITDA level across the year in FY17), it expects the deal to be significantly earnings enhancing in FY18, with the overall group becoming profitable. MMS will also front load its contract with set-up fees of £5.7m in FY17 supporting near-term cashflow.

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