Rupert Murdoch’s BSkyB has sold its interest in Easynet Global Services to a private equity arm of Lloyds Bank for £100m. Those behind the deal see cloud services as a key attraction — and are looking for consolidation opportunities 
 
 
 



Daniel Sasaki, LDC: first telecoms deal after nine to 12
months of looking at many opportunities 

 
 
 
 
LDC, the private equity arm of Lloyds Bank, has bought Easynet Global Services from BSkyB, the UK satellite TV company controlled by Rupert Murdoch’s News International.
The new owner — subject to regulatory approval — has hired Hanif Lalani, former CEO of BT Global Services, as a non-executive director.
The bank won the deal by approaching Sky directly after it had already mandated Merrill Lynch to auction the business. The auction was called off after Lloyds agreed to pay £100 million for the operation, which is the international services arm of Easynet, bought by Sky at the end of 2005 for £210 million.
The UK business of Easynet, including its ISP operation, has been absorbed into Sky as part of the service it offers satellite TV customers.
Easynet CEO David Rowe, who has been with the company since before Sky’s 2005 purchase, will stay with the company. Indeed, his team was part of the attraction for LDC, says Daniel Sasaki, director of the bank’s unit. “We were very impressed with David and the team as operators. We’re backing the management team.”
According to Rowe: “This is an excellent deal for Easynet. It provides us with additional capital to help fund the company’s next phase of development, give us access to LDC’s deep sector knowledge and experience and allows us to retain a business relationship with Sky and continued access to the company’s fibre network, which are all elements that will be very beneficial to our future growth and success.”
Regulatory approval

The agreement to buy Easynet is subject to regulatory approval and a works council consultation in respect of certain Easynet employees. The company has businesses across Europe, in some of which workers’ representatives have to be consulted according to local law.
Easynet designs and manages data networks for large businesses as well as providing managed hosting and video conferencing solutions around the globe. It also provides fibre services for smaller businesses in the UK and the Netherlands.
As part of the deal, the assets and employees related to the corporate network management and hosting business will remain with Easynet. Sky and LDC will enter into a long-term supply agreement to grant Easynet Global Services continued access to the Sky’s national fibre network in the UK, used by Sky Broadband and Sky Talk services. Sky will also continue to be a business customer of Easynet.
That UK fibre network was first built up by Easynet and its predecessors before the Sky takeover. Its ancestors include an early ISP, UKOnline, which was founded in 1994 and became part of Easynet in 1996. But it picked up one of its key assets five years later, as it bought Marconi’s UK nationwide network, Ipsaris, in a share-only deal valued at the time at £357 million.
Canal network

Ipsaris was unusual in that its core network runs along the side of 18th and 19th century canals, linking cities such as London, Birmingham, Manchester and Leeds along routes that are easy to reach for maintenance but undisturbed by traffic except for a few narrowboats moving at six kilometres an hour.
The buyer of the global services business, LDC, is “the captive private equity arm of Lloyds that has grown aggressively in the past few years”, says Sasaki. Its strength is that “we can invest off the balance sheet of the bank as opposed to off a fund”, which gives in more independence than most private equity investors, “so long a we generate a return for the bank”.
LDC is particularly known for management buy-outs: one of its earlier deals was 10 years ago, when it helped the managers of Quantel buy the TV and movie special effects firm from another TV broadcaster, Carlton Communications. Quantel is still part of LDC’s portfolio.
But a deal such as the Easynet purchase is more complex than a normal MBO, as just part of the company — the global services division — is being taken away from the current owner.
This is the first telecoms deal for LDC after “nine to 12 months of looking at many opportunities”, says Sasaki. The unit does have investments in IT but not in telecoms, though Easynet may mark a change. Further investment in Easynet will follow, he suggests: “We want to build the team to grow aggressively — organically and inorganically.”
Boutique bank

LDC took advice from an independent boutique bank, Arma Partners, before proceeding with the deal. Tom Wells, a partner at Arma, is former head of corporate finance at BT. He joined in 2009 after a spell at Merrill Lynch, where he was a managing director and head of telecom investment banking for Europe, the Middle East and Africa. At Merrill Lynch and previously at Citibank he advised operators from O2 and Deutsche Telekom to Bharti Airtel and China Mobile on $150 billion worth of transactions.
For Easynet “an acquisition might make a lot of sense”, says Wells, as “telecoms benefits from scale” — either more footprint geographically or more scale within a given area.
“The pressures for further consolidation exist. There are things that will get done because they make economic sense.”
According to Sasaki, cloud services made Easynet particularly attractive to LDC. “Easynet has two separate but related businesses,” he says: a network that serves multinational companies and the ability to host applications. Advances in cloud computing mean that the ability to host apps and run communications mean “this is the ideal platform that is going to drive the organic growth of the business”, he says.
Easynet “is not encumbered by legacy voice services”, he adds, which means that it is able to offer “pure play cloud computing — that’s an advantage in the emerging market of new services”.
The operator has customers that are “tier two multinational companies”, he suggests — with annual service bills around £1 million to £2 million. Companies such as AT&T, BT and Verizon focus on the very largest, but smaller customers “still need sophisticated services”.
Growth niche

“We like his strategy,” says Sasaki. The company is in “a strong growth profile niche”. It is “focusing on large corporations” so it is not exposed to the fluctuations of the consumer world. “Some of the layer one and two network assets stay with Sky, but there is a key supplier relationship,” he adds.
Another attraction to its new owner is that Sky has invested in new network and data centres for Easynet. “No big investment is needed at the moment,” says Sasaki. “The business has been well invested in.”
Others seem to hold the view that the emergence of cloud services mean that there are new opportunities for investment in smaller telecoms operators. “It’s driving a lot of behavioural change,” says an executive close to the Easynet deal.
Easynet was something of a surprise acquisition for Sky, though it has helped the satellite TV broadcaster develop its consumer offering in the UK.
In 2007 Rowe told Global Telecoms Business that following the Sky purchase there was “a long-term plan to create value in the enterprise side of the business”. The enterprise business was “in a bit of a sweet spot, providing complex wide-area networking solutions over quite a big footprint, and it’s growing fast”.
However Easynet did not have the scale for some deals. It was getting to the shortlist of “a lot of meaty contracts prior to Sky, but we were falling at the hurdle of financial strength”, he said in 2007. “We were falling at the hurdle of size of reference sites.”
He saw that with the Sky deal that had gone away. But perhaps now he is back in a company valued at only £100 million — even with the security of a long-term services deal from Sky — that problem will recur.
Hence perhaps Sasaki’s hints about this being the first of a number of deals will come true. Though now competition in developed markets such as Europe, North America and Japan means simply providing digital telecoms access is less interesting and less lucrative. Operators are exploring the possibility of earning revenue from providing cloud services.
There is potential for straight network investment, says one financial observer: but in remote places, where there is currently little or no access to the internet — even the oceans and the deserts. There are new opportunities for satellite services there.
Flexibility

But that’s not a market for Easynet. Conventional private equity funds “have a narrow time horizon”, says Sasaki at LDC and LDC is more flexible, hinting that “a year or two down the road” he and Rowe will be looking round for a competitor to acquire. “Flexibility is helpful for us.” Rowe is clearly ambitious in the market — though he was unable to talk to Global Telecoms Business in time for this article: he has been keeping well in touch with the financial world, clearly looking for a way to find backers for that MBO.
He found LDC. It sounds as if his financial friends have ambitions for Rowe and Easynet. But it’s a tough game, is telecoms. We’ll see if he achieves them. GTB
GTB interview with David Rowe, 2007 http://www.globaltelecomsbusiness.com/Article/2199421/Search/Results/From-the-canals-to-Shanghai.html