Acquires A3 for a total price of SEK 622m

The two companies will have >450,000 fibre customers

11x EV/EBITDA & 20% cost reductions equals SEK 1.96

The new company will be 2x current Bredband2
This morning, Bredband2 announced that it seeks to acquire the Swedish broadband operator A3 Allmänna IT- och Telekomaktiebolaget (A3). In 2019, A3 generated sales of SEK 804m and an EBITDA of SEK 72.5m. As such, the new consolidated company will generate sales of ~SEK 1.5bn and an EBITDA of ~SEK 150m. Furthermore, the new company will handle more than 450,000 active fibre customers. The total transaction price amounts to SEK 622m, in which A3’s shareholders will obtain 8 new shares in Bredband2 and SEK 6 in cash for each share that it holds in A3.

We see clear cost synergies
We have previously argued that the Swedish broadband market is fragmented and that consolidation has already started. The acquisition of A3 marks another sign that consolidation is still occurring. In our view, there should be clear cost synergies to be found amid the acquisition, especially on personnel and other costs. If we annualize A3’s H2’20 EBITDA and assume that it is possible to reduce 20% of its opex, the two companies would generate a 2021e EBITDA of SEK 185m.

Scenario analysis
In the attached sensitivity table, we show a scenario analysis for the share price on various inputs on EV/EBITDA multiples and the percentage reduction in A3’s opex could occur in light of the integration. Based on Bredband2’s current multiple of c. 11x 2020e EV/EBITDA, a reduction of 0-50% of A3’s 2019 opex would yield a share price of 1.62-2.57 per share.

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