SICOM started as a QSR POS company but has been cobbling together solutions for a more complete offering. As proof of its changes, more of SICOM’s restaurant customers use its digital signage and drive-thru directors than do its POS product. From SICOM:
SICOM has over 40,000 digital menu boards, 8,000+ Drive-Thru Directors and 7,000+ CHEF Kitchen Management solutions in operation worldwide, while its POS systems are in more than 6,500 restaurants worldwide and it has more than 10,000 restaurants [from the RTI acquisition] leveraging its enterprise management systems globally
When we looked at the pricing of the deal, what struck us was the seemingly steep price per restaurant account given the comparable (comp) set by Heartland Payments (now Global Payments) in its acquisition of its own legacy POS assets.
Here’s the financial top line of the deal:
Posera today announced the sale of its FingerPrints point-of-sale (POS) system to SICOM Systems, Inc. for $9.8 million USD subject to closing adjustments [probably working capital].
How many restaurant locationss did SICOM acquire?
If we do some quick math – diving the sales price by the number of locations – we end up placing a value north of $8,900 on each location.
Before we dissect this much further, let’s look at the comps set by Heartland in its POS acquisition frenzy from 2015.
On February 11, 2015, the Company [Heartland] purchased the stock of Dinerware for a $15.0 million cash payment, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.
On January 30, 2015, the Company purchased the assets of Automation, Inc. (“pcAmerica”) for a $15.0 million cash payment, plus net working capital. The cash purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.
On October 31, 2014, the Company acquired the net assets of Xpient Solutions, LLC (“Xpient”) for a cash payment of $30.0 million, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.
To get to a price per location, we need to know how many locations each of these three POS assets had.
Dinerware was sitting at 15,000 locations, but they also had 10,000 locations that were white labeled to Harbortouch and First Data. If we take their $15MM purchase price and divide it by both of these numbers we get a range of $600 – $1,000 per location.
PC America had 25,000 locations, 15,000 of which were retail. The retail locations weren’t given away for free, so this gives us a value of $600 per location.
Lastly Xpient had 30,000 locations. At a $30MM sales prices, that’s $1,000 per location.
Of course we should consider the amount of revenue those 1,100 Fingerprints customers might generate. The net result of Heartland’s POS purchases was an annualized increase in net revenue of $33.2MM as seen in their 10Q below.
[Over a three month period] the increase in other revenue included $8.3 million of net revenue added by Xpient, pcAmerica, and Dinerware (which are all part of Heartland Commerce).
In total Heartland acquired 80,000 merchant locations for $60MM that were earning an annualized revenue of $33.2MM for their POS providers. This means each merchant location was “earning” $415 in revenue for their respective POS company, and Heartland paid a blended average premium of 80% over previous year’s revenue, equaling $750 per location.
We also need to consider the types and sizes of the locations acquired. Smaller merchants are presumably worth less than larger ones because there’s a greater probability for customer bankruptcy, they earn less revenue, and smaller merchants are always harder to deal with. On the plus side, smaller merchants pay more in processing fees, but SICOM did not acquire any of the processing business. (Xpient, which services mostly recognizable QSR brands, is going to be a great comp for us because their core customer is roughly of the same size and type as the restaurants SICOM acquired… keep reading.)
So if we look at these financial comps in relation to the 1,100 locations SICOM is acquiring, what justifies the nearly 12x increase?
For starters, SICOM acquired the services contracts. That could be worth a good amount of money, but not the difference of ~$8,000 per account. Ask any POS dealer and they’ll tell you there’s no way they’re getting $8K on annual services per location unless there’s a break/fix contract and the site is basically broken all the time. But long before that $8,000 cost would be reached the merchant would switch POS providers. A reasonable service contract might look like an additional $1,500 annually per site.
Those 1,100 Fingerprints locations are Tim Hortons, however. Tim Hortons earn about $650K in annual revenue – inline with the average Xpient customer. To get this number take Tim Hortons’ 2016 revenue and divide it by number of locations. And since QSR is such a low margin business there’s no logical reason to believe Tim Horton’s agreed to pay Posera substantially more to use Fingerprints than other QSRs pay to use Xpient. So it’s unlikely Posera was earning substantially more than Xpient earned from its merchants (~$1,000 per year for easy math).
There are, however, two major differences between the assets Heartland acquired and Fingerprints POS: a sales channel, and recurring revenue. Fingerprints was sold and supported directly by Posera, which was transitioning to a recurring revenue model and had 50% (550) of the locations converted. Heartland’s POS acquisitions had revenue share arrangements for their channel and were perpetual license deals. Since revenue share can become a cost of goods sold (COGS), and recurring revenue is a reliable cash flow, it’s Fingerprints commanded a premium over Heartland’s POS acquisitions. What reasonable multiple could be applied?
SaaS is generally given a 5x annual recurring multiple. So if 550 Fingerprints accounts were paying $1,000 per year, it could be worth (550 x $5,000) = $2.75MM. The other accounts are then worth $550,000 (since perpetual licenses are usually 1x annual revenue), leaving us with a total value of $3.3MM, which is still a good bit short of the nearly $10MM purchase price.
Perhaps this multiple isn’t based on financials, but strategic opportunity. Tim Hortons was recently purchased by 3G, the private equity group that owns Burger King and Popeye’s. And SICOM just coincidentally has the POS contract for the Burger King account. SICOM more than likely viewed Fingerprints as a way to:
- Get into Tim Hortons, a large and respected brand
- Buy a POS that would work in Canada
- Solidify their relationship with 3G which might lead to more business with 3G’s Popeye’s
- Establish a larger base to cross-sell their other offerings
Think of acquisitions like this chart:
SICOM could have convinced themselves to pay what they did not because of some underlying fundamentals, but for what SICOM thought it could do with the asset. Executing on this strategy and capturing the upside is entirely possible, but we’ve also seen our fair share of POS companies struggle with non-core efforts. So we remain a little skeptical.
Or, this premium might have derived from the notion that the channel is a liability. By virtue of having direct access to each account, SICOM might have said,
You know what, we think NOT having a channel is worth a premium of 3x.
Impartial evidence from a secret shopping exercise has supported this line of thinking as well, and it’s the same reason Micros was consolidating its channel prior to acquisition by Oracle: there are too few dealers that are any good.
At a minimum we have some new numbers for POS comps, especially accounts with recurring revenue. The jury will be officially, and publicly, out on these numbers until Lightspeed publishes its S-1 in 2018/2019.