F12.net narrows majority stake sale process down to three private equity buyers, CEO says

26 May 2020

F12.net, an Edmonton, Alberta-based managed IT services provider, is exploring a majority stake sale to fund geographic growth and acquisitions, said CEO Alex Webb.


The privately held company, which generated revenue of CAD 37m (USD 26.5m) in 2019, began speaking with US and Canadian investors in January. Given its desire for an IT-focused investor, F12.net quickly narrowed the field down to three private equity sponsors and is in early stage negotiations with those firms, Webb said.


Though investment interest waned somewhat in March and April due to the COVID-19 pandemic, the business continued to attract buyers given its continued growth throughout the pandemic, the CEO noted.


The company is not working with a sell-side investment bank but maintains a relationship with buy-side advisor FirePower Capital.


To date, F12.net has completed nine Canadian acquisitions, with eight of those deals occurring between 2015 and 2019. Targets have ranged in size from CAD 1m to CAD 10m in revenue, Webb noted, and all acquired accompanies are integrated under one system.


Sale proceeds will help fund near-term acquisitions in Ontario and international buys within 12 to 18 months in the US, the UK and/or Australia.


F12.net’s core offerings include hardware-as-a-service, and private and public cloud services. The company operates throughout Alberta, British Columbia and Ontario, where it has eight offices and 200 employees.


Right now, F12.net is seeking to acquire Ontario managed services providers (MSP) with between CAD 3 and CAD 20m in revenue, and ideally those with CAD 5m to CAD 10m in revenue. For future international buys, it is keen on MSPs with revenue between CAD 20m and CAD 40m.


Webb, 48, founded F12.net in 1996 and is the company’s largest shareholder. The remainder is held by five partners (via acquisitions); institutional investor Roynat, a subsidiary of the Bank of Nova Scotia [NYSE:BNS] that invested in 2016; and an employee stock ownership plan (ESOP) that currently comprises eight employees. No one person or entity holds more than a 50% share.


The business caters to highly regulated industries including professional services, healthcare and financial services. Customers typically have between 20 and 350 employees, with approximately 100 employees being F12.net’s sweet spot. In 2019, F12.net served 850 companies.


Roughly 70% of F12.net’s overall revenue is contractual, reoccurring managed-services revenue. The company’s EBITDA margins ranges between 15% and 21%, depending on reinvestment that year. The business has grown at a compound annual growth rate (CAGR) of 30% for the last seven years.


Webb said F12.net is still expecting growth this year, though it remains to be seen exactly how much given the current COVID-19 pandemic. Right now, the company is tracking 8% ahead of last year and existing and new business is starting to pick up as companies bring back furloughed employees and start to hire again.


MSP consolidation in Canada has been slower than the US, Webb mentioned. Most notably, Ottawa-based CareWorx and Vancouver-based Fully Managed Technology merged in December 2018. In February, CareWorx Fully Managed acquired Calgary-based MSP TWT Group, which had 30 employees.


Valuation multiples for MSPs of F12.net’s size can reach upwards of 10x EBITDA, Webb said. Those on the smaller side usually sell for between 6x and 8x EBITDA, he added.


F12.net competes primarily with in-house IT, and local and regional players that are similar in size or larger. The largest players in the space, such as Montreal-based CGI [NYSE:GIBB] and Calgary-based Long View Systems, focus primarily on large enterprises with more than 500 employees, Webb noted.


F12.net uses law firm Dentons and accounting firm BDO.