Route Mobile Limited (PROX) Earnings Call Transcript & Summary

Hello, and welcome to the Proximus conference call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Guillaume Boutin, CEO, to begin today's conference. Thank you.

Ladies and gentlemen, welcome to the special webcast covering our announcement earlier today. People who are following Proximus a bit closer, know that our international segments are a fundamental part of the growth trajectory of the company. This is a topic we covered extensively during our CMD in January. In that context, it won't surprise you that I'm very enthusiastic about the transaction we just announced, which allow us to become one of the worldwide leaders in CPaaS and Digital Identity. I will, therefore, take the next 10 to 15 minutes to walk through this strategic and transformational step for our group. And let me start with an overview of the deal. I won't go into the details of this page since many of these elements are covered in the rest of the presentation. I will rather focus on the key highlights. Through our subsidiary, Proximus OPAL, we will acquire a -- controlling majority of Route Mobile to purchasing close to 58% of the shares for a cash consideration of EUR 643 million. Remaining listed shares, we are launching a mandatory takeover offer at exactly the same price per share as for this 58%. Then, Route Mobile's founding shareholders will reinvest in Proximus OPAL, the company which owns 100% of Telesign and the acquired controlling stake in Route Mobile. The net cash consideration for us will therefore be EUR 343 million, rounded excluding the MTO process. Through this operation, and this is crucial, Telesign will implicitly be valued at EUR 1.4 billion. And before I get into the details of the strategy rationale, 2 other numbers you should have in mind. First one is a combined annual revenue of Telesign and Route Mobile this year, which will be reaching EUR 900 million, propelling us among the top 3 players globally in terms of volumes and in top 5 in terms of value. And second one, the transaction is going to be highly value accretive, with EBITDA synergies estimated at a minimum of EUR 90 million per year at run rate. That slide will summarize the 5 key value drivers for our group. First one, this transaction is highly value accretive, as I said, and an efficient capital investment in the fast-growing CPaaS market. Second, Route Mobile is a well-established company, with a track record of delivering strong financial results. The third one is that in combination with our U.S. subsidiary, Telesign, the transaction will turn the Proximus Group into one of the leading players in the CPaaS space. Since Route Mobile management will be invested in the combined entity, we ensure that all incentives are aligned to make this work and deliver incremental value for all stakeholders. However, the product offering of Route Mobile as well as its geographical footprint, are highly complementary to those of Telesign, hence, creating very interesting avenues for further revenue growth. Then there are also the synergies I already mentioned, these synergies are roughly 75% cost synergies that will come from the complementarity of the platforms, combined with the offshoring of several activities to lower-cost geographies. And we are, as management, extremely confident to get to at least the EUR 90 million number mentioned here. Let's deep dive now in those different elements. First, as you all know, CPaaS is a very large market, reaching $53 billion by 2026. And it's also a fast-growing market with a CAGR above 20%. Growth will be underpinned by several structural trends, the ongoing digitization of our societies, the acceleration of the move to cloud across sectors and of course, AI which will help create more relevance to those industries and boost volumes. Let's take now a closer look at Route Mobile. In short, Route Mobile is a global CPaaS provider, with offices in over 20 locations, employing over 700 people and servicing over 3,000 active customers. Founding family with the majority owners earning roughly 58% and is the shares that we are acquiring. The remaining 42% is free float, listed on the Indian stock exchange. Current market cap is around EUR 1.1 billion. Route Mobile has a world-class executive team that has shown a superior execution ability. I'm therefore, delighted they will be investing the combined entity, Telesign and Route Mobile, so we can continue to count on their expertise and drive. As to the product offering, Route Mobile is primarily a CPaaS provider, so they have also some early-stage DI assets and capabilities. And for those that are less familiar with the CPaaS market, customers of Route Mobile interact with our customers with omnichannel communication platforms, which basically provides the ability to how to deliver the right message in a secure way to the right person while using the preferred communication channel and all this being powered by AI. Route Mobile has reported a strong and generally above-market revenue increase in recent years, both driven by organic and inorganic growth. Specifically for the last full-year results, the company announced an increase in revenue of 78%, of which the organic growth was 41%. The midterm ambition, 3 to 4 years out, is to become a $1 billion revenue company. Route Mobile is also a profitable company, which delivers an attractive EBITDA margin of 12.8%. And as a key difference to the telco sector, which business -- Route Mobile's business model requires minimal investments in fixed assets, which helps to drive strong growth on ratios. Their low capital intensity is reflected in a strong EBITDA-to-cash conversion. So how big is going to be the combined entity, Telesign and Route Mobile? You have the answer on this chart, where you see that Proximus Group will be holding a solid top 3 position in the global CPaaS market, based on aggregated messages volumes. At Telesign, Route Mobile is a company with presence across the globe. As I alluded to earlier, there is a strong complementarity in terms of regional presence. Route Mobile's business is strong in a number of areas and especially in its own market, India, which is one of the world's largest and a rapidly digitizing regions. Telesign's business mainly concentrates in APAC, Europe and North America, which is therefore great potential for both companies to expand their respective footprints. In terms of product offering, these two both companies show a strong complementarity, which creates significant revenue growth opportunities through cross-selling each other's services. Route Mobile's advanced omnichannel capabilities will benefit from the strong expertise and commercial presence of Telesign, especially in the U.S., but also in regions where Route Mobile is less prominent. Parallel, being strong in CPaaS volumes and having a truly global presence will allow us to supercharge Telesign's ability to deliver on fraud protection and verification. As I said, we are very confident to deliver at least EUR 90 million of yearly synergies. And besides the revenue synergies I just mentioned, we estimate also significant cost synergies, which will account for 75% of the total synergies. For example, as already indicated and as a result of the consolidation of the 2 CPaaS platforms, we'll be able to offshore some of Telesign operations to lower-cost geographies. Combination of both companies will also provide additional benefits in terms of COGS. And the synergies will, of course, be beneficial for both parties. Mark, I think you're going to get care of the next two slides.

Thank you, Guillaume. Turning to the specifics of this transaction, the agreement we have signed consists of several steps. The agreements for our subsidiary Proximus OPAL, took our 57.56% of the Route Mobile shares. This represents the full share of the founding shareholders on a fully diluted basis. For the total cash consideration of EUR 643 million, the price paid per share is at no premium to the 10-day volume weighted average price. The acquisition of the majority interest in Route Mobile will, in line with Indian regulations, trigger a mandatory takeover offer of up to 26% of the voting share capital of Route Mobile for the same price we paid for 57.56%, so at no premium. Therefore, depending on the outcome of the MTO, the stake held by Proximus OPAL could further increase to around 83.56% of Route Mobile's shares. Total cash consideration for this part of the operation will be determined by the effective MTO take-up. The acquisition of the majority stake in Route Mobile for the MTO will be followed by a reinvestment of close to EUR 300 million by some of the founding shareholders of Route Mobile for up to 14.5% of the shares of Proximus OPAL. So overall, Proximus will acquire a controlling interest of nearly 58% in Route Mobile, valued at EUR 643 million, with the net impact on cash being roughly EUR 343 million, including reinvestment in Proximus OPAL. Note also that the reinvestment by some of the founding shareholders of Route Mobile values Telesign, at EUR 1.4 billion, a strong increase from the EUR 219 million cash consideration we paid back in 2017 for Telesign. As customary, the agreement remains conditional upon the receipt of regulatory and antitrust approvals and the completion of the mandatory takeover offer. We expect to close the transaction within the next 6 to 9 months. The financing of this transaction has been fully secured through a bridge facility, which shall be followed by the issuance of a new Board on closing of the transaction. We don't expect a meaningful impact on the Proximus group leverage ratio independent of the MTO outcome, we anticipate to remain within the company's comfort zone of less than 3x net to debt to EBITDA under S&P's definition. And Guillaume, I'll hand it back to you.

So to come to the transaction, clearly, this is a transformational step of Proximus as we significantly scale our international activities. We'll also have access to world-class technology, which we will be able to cross-sell in a worldwide customer footprint. And along the way, we'll capture the substantive synergies at both revenue and cost levels. And to end this presentation, so what's next for us now? No surprise that closing this [ deal ] will be a key focus point of the coming months. But in parallel, we'll deliver on our domestic market with 3 major objectives that you already know: Maintaining a strong commercial momentum, leveraging our superior gigabit networks, being fully prepared for the arrival of [ DiGi ], whenever they arrive; and we will continue to strive for supporting [ regulatory ] framework for fiber so that we can invest in fiber with nice returns for all stakeholders. With this, I have covered my presentation. So should there be any questions on this transaction, we can take them now. Note that any questions outside this context will be covered next week Friday, when we will release the Q2 results of the company. Thank you.

[Operator Instructions] The first question comes from the line of David Vagman calling from ING.

So I've got two. First, on the governance of OPAL. So if we can come back a little bit on the -- so on this holding company, so do you intend to transfer economically the CPaaS business of Telesign to Route Mobile? And the other way around, could you transfer the digital business of Route mobile to Telesign? So knowing that from a management point of view, I understand that the CEO of Route Mobile will be managing this CPaaS business of TeleSign. So that's my first question. And second, more on the financial of the deal, so you say that the -- based on the reinvestment of the founding members of Route Mobile, Telesign is valued at EUR 1.4 billion. How does this take into account the annual synergies of at least EUR 90 million? When I do simple math, and possibly, this is incorrect, it seems to me that you derive the EUR 1.4 billion allocating all the synergies to Telesign and none to Route Mobile. These are my questions.

So I'll take the first one, Mark, and you take the second one. On the governance, I think we'll give more clarity when we have closed the operation. But I think the way I look at it from where we are today is that we have to separate what are the legal entities of Telesign and Route Mobile and OPAL from the way we're going to [ steer ] the business. We're going to have business line on CPaaS, and we're going to have a business line around [ DI ]. And then you're going to have some legal entities dealing with the domain they [indiscernible] today. So that's the way I look at it from an operational standpoint. And -- so that we can make sure that we can deliver value for both companies as well. And I will let Mark answer the second question.

Maybe a very quick follow-up on this one that I forgot to ask this, who will be managing OPAL? Or that's not really relevant?

It's not really relevant, but both Joe and Rajdip are going to report to me. So at the end of the day, I will be managing OPAL, but operationally, it doesn't make sense...

David, thanks for the question. I think the way that I would look at it is if you look at the value of the reinvestment by the founding families or promoters of Route Mobile, the reinvestment and the share that they get into OPAL effectively gives us that valuation, and that's pre-synergy. So that's how we get to the math on the valuation of Telesign.

Okay. So that's the way to understand, it is pre synergies. Because I was -- yes, I was going to say, indeed that the Route mobile shares, I think you'll agree with me that they've done quite well, actually, I would say, also relatively speaking, compared to CPaaS players. And I was wondering, how we can explain that basically, they're not asking for a control premium and especially also given the synergies, which are really significant, it seems to me?

Yes. I mean, I get that question. So that's -- I think this is not the way you should look at it. I think this is a transaction that has been discussed for months that is good for both parties. And I think we cannot comment on every detail on the transaction, obviously. But at the end of the day, we have a transaction that will create value for everyone. And that's really the objective of that transaction. And I can repeat what I said. But when you look at the synergies, when you look at the geographical footprint complementarity, when you look at the product capabilities that are very, very complementary to each other, I think the [ deal ] will create values for all stakeholders, existing shareholders of Route Mobile, future shareholders of Route Mobile, but also for Proximus stakeholders.

The next question comes from the line of Nicolas Cote-Colisson calling from HSBC.

You talked about geography and product complementarity. So how complementary both client bases are? Can you update us on what the proportion of the revenue and maybe gross profit of top 3 clients are representing for Telesign and also for Mobile Route? Got a second question about the financing, can you give us some indications on the conditions for the bridge financing? And what kind of cost of debt with the bond that you are expecting for financing that deal, please?

The first question, I think we do not disclose that information, Nicolas. But what I can say is that the Route Mobile has a more diversified customer base compared to Telesign, so it will be probably a positive on that front. But we are not disclosing the top 3 or the top 5 customer concentration of Telesign. I think we [ missed ] some information that during the IPO deck to you, but we are not updating that information.

Nicolas, on the financing, it's a little bit the same, right? Again, the deal is fully financed, but we're not disclosing the details of that.

Okay. So maybe a follow-up, just to get an answer on one of my question. On the synergies, I have to say I'm struggling a bit with the synergy number. It's a very high number. But before I take this for granted, can you just get through a bit more details here? Because obviously, Telesign makes no EBITDA today, may change in the future, and Route Mobile EBITDA is not that huge. So your EUR 19 million, I was also wondering, what is the cost of consolidating the platform?

I think we're going to give more clarity on all the details of the synergies when we're going to close the deal, for obvious reasons. But I think if you look at the combined entity and if you look at the best players in the field of CPaaS, you have EBITDA margin around 13% to 15%. And I think if you look at what we have announced, we want to be best-in-class in terms of EBITDA margin for the industry, so to be at least at that level. And that will be really the objective of the management team to be best-in-class. And with the structure of the group that we're going to have, with the tropism of the group being around India and India subcontinent, I think this is clearly an objective that is realistic. That's why we are extremely confident to reach at least EUR 90 million of synergies for the combined entity, going forward. Really, that's something we think it's an objective that we can meet, and we are quite confident to get there. We made some analysis, primary analysis, that we are confident. And amongst those EUR 90 million of synergies, we are also confident that at least 75% of those synergies are going to be around cost synergies on COGS and on OpEx.

The next question comes from Joshua Mills calling from BNPP Exane.

Guys, thank you for the questions, a few from my side. The first one is, what was the rationale for undertaking this transaction now? A year ago or so, when the stack of Telesign failed, I think the comment from management was "We can achieve all our objectives on a 2-year view with EUR 90 million sort of funding." So obviously, this accelerates the targeting to become a EUR 1 billion revenue company. But what was the pressure to do this now rather than wait perhaps until we resolved the Telesign position within Proximus Group? So that's the first question. The second question is, could you give us any kind of sense of what the impact of this will be on Proximus Group free cash flow to equity in the near term? So I understand that there's targets of EUR 90 million synergies, and we can do the pro forma on the 2 businesses based on Route Mobile's disclosure in your previous IPO guidance. But given that there's a time you're making cash at the moment, it would be interesting to understand what near-term headwinds from these integration costs, financial costs, there will be. And then the final question is, what happens to the remaining stake in Route Mobile at the end of this transaction, be that, say, 42% stake for a 25% stake? Forgive me, I'm not that familiar with the Indian kind of listing laws, but is there any scenario in which you have to come back and acquire the remaining minorities? And if so, what does that mean for your potential exit as Proximus Group from the Telesign business or the spin-off of the transaction that was initially envisaged?

I'll start with the first question. And Mark, you are probably going to take the #2, #3. So why now? I think making that deal, we are also de-risking the trajectory of Telesign, going forward. Because here, we are acquiring a best-in-class company, led by an executive team that has delivered in the past and that also delivered its ability to run a CPaaS business profitably. And I think this is one of the key rationale of the deal, being subscale in the CPaaS market is probably not the right strategy. With that deal, we're gaining scale, being top 3 in terms of volume, so we can scale the platform and make sure that platform that Telesign had before, thanks to the addition of Route Mobile, will be rapidly profitable one, thanks to the efficiency that will be brought by the fact that Route Mobile is going to be part of our environment. Second, here, we start always acquiring a founder-led business and how you convinced founders to reinvest meaningfully to partner with you, going forward. And the spirit of the deal is fantastic because this is a deal where the acquisition of the 58% stake is financed partly by cash and partly by equity stake and again, with an implied value of Telesign at EUR 1.4 billion before synergies. So here, we are managing to use the currency of Telesign to derisk our [ interactivities ], development, bringing within the family of the Proximus group an entity that has proved to be strong, profitable and super efficient as it comes to managing its cost base. And last element, access to India. Access to India is key because it's a 1.4 billion people, a country where digitization is a bit lagging behind compared to some other European countries. So the growth for CPaaS players in the context of India is going to be really, really a tailwind for that deal. Last, as I said, our ability -- because this is Route Mobile, to deliver the synergies is probably not comparable compared to all other combinations we would have sought to execute with other players of the market. So I think we have cherry picked the only -- the best player of the market and probably led by the best executive team of the industry. And in terms of ability to deliver efficiencies, I think this is the best partner that we have chosen. So that's another element. And then last element, as you might have understood now, it's a quite structured transaction, performed with a very, very strong balance sheet discipline. And here we are, again, capturing many of the strategic and financial goals we have set in the past for our international activities and for Telesign. So that's really completely 100% aligned with the vision of our international [ ambitions ]. And I think we stay in control. We own the combined entity. We're going to get at least 58% of Route Mobile. And I think in the context of the CPaaS market of today, being in the top 5 players and owning 1 of the top 5 players of the industry is really something that will create significant value for our shareholders, I'm convinced of that. And Mark, can you answer the other question?

Yes. Josh, thank you for the question. On the free cash flow, I think I'll refer back to Guillaume, we'll come back fully with a view of what that looks like on closing. But I mean just 2, 3 points. It's clearly going to be free cash flow accretive. We are confident on the estimation of the synergies that we've set out as be at least EUR 90 million. So I think it's -- for us, we see this is highly value accretive for the company. In terms of the remaining stake, we will remain the majority owner of a listed company in India. We have no obligation to do anything further than our purchase of Route Mobile's founder stake and deal. And there are many examples of great companies -- with listed companies in India. So that's where we are on the kind of structure of the stake in the public company in India.

It's really clear. Can I just come back on the first question? So if you don't mind me asking, how long have you guys been looking at this transaction? Was it already on the table when you were thinking about the SPAC? And now that you've done this deal, should we expect further follow-on bolt-on acquisitions by Telesign? Or do you think that this gives you the scale required to compete with the #1 and #2 players? The reason I'm asking is, yes, it does seem like there's been a shift in the [ messages ], commentary made by management at the point when it's [ backfilled ] to where we are today with the size of this transaction.

So in terms of what we had in mind, I think this is really fully aligned with what we have in mind. So we have reinvested in the growth of Telesign to make sure that we can exercise and crystallize the value of Telesign as soon as possible. Here, we are using a currency of Telesign at EUR 1.4 billion to acquire a company with -- compare us within the top 5 players of the industry. So this is exactly what we wanted to be when we thought about leveraging the growth of Telesign to crystallize value. It's, of course an intermediary step towards more value crystallization. If you ask me whether I want to do some other movements -- such movements as of today, I think my clear answer to that is going to be, we have, first, to focus on closing that deal and delivering the synergies that we have announced today. And that will be the focus of all the teams of the combined entity in the coming quarters. So that's really the priority for us as we speak now.

The next question comes from the line of Roshan Ranjit, calling from Deutsche Bank.

Maybe just a follow-up to Josh's one actually. Guillaume, you and Joe talked about the need to scope for scaling up Telesign back in January? And at the time, I think the thing was more on the kind of material organic opportunities and hence, the potential drains at the EBITDA level. So just talking about your previous answer, should we now think about the immediate focus being on this deal integration and maybe the scope of scaling up geographically from the kind of underlying Telesign business being on the back burner or not needed anymore? Or is it a case of right, we're still going to go after that, but let's integrate this deal first and then further go up to scale up on the organic side? I guess my question is, have you got the appropriate scale, now that you think you need, or still hungry for more?

I think now we have reached a scale, which is a scale that allows us to deliver a profitable CPaaS activity within the group. The scale we had before without [ that move ] at TeleSign was more difficult to deliver probably. Now we have a highway to deliver, thanks to the scale of that deal. We have a highway to deliver the 15% EBITDA margin kind of target we have in mind for this activity, in a context where there is no CapEx in those activities. So it means that there is a huge cash conversion once you have delivered the EBITDA of the business. So focus, I think we've got the scale now, our focus will be on delivering the organic growth, but of course, also the cost synergies because we have reached the scale we needed to get there.

Next question comes from Nuno Vaz, calling from Societe Generale. Please go ahead.

Just a few questions on my side as well. First on the financing side. Firstly, was there an interest in sort of keeping this minority in India? Was there, at any time, the possibility to take the whole company private? Because this makes the structure a bit more confusing. And then, was there any opportunity for -- to do a more equivalent equity for equity swap with the founders because Proximus has to, of course, invest a lot more in net cash than the funders? And then another point would be if there's any interest at a later point to sell more minorities and -- in OPAL once the transaction closes as Proximus was looking to do in Telesign in the past? Then a few questions on the EBITDA because the synergies are quite significant, but Proximus was sort of guiding for Telesign to improve the EBITDA quite significantly already. So it's tough to know where the combined EBIT of the group will land. What sort of -- could you give any numbers where we might -- in the medium term, the EBIT of the combined business might end up, including this sort of EUR 90 million synergies? And on those, if you could give a bit more detail in just -- especially consolidating the CPaaS platform synergies come from specifically, especially given that the -- I'm assuming the companies will continue to operate very much independently and the geographies are so distinct?

Mark, you want to...

Yes. I mean, Nuno, I think on your first two questions, we've been discussing with the founders this deal for some time. And I think the deal we struck, we think, provides fantastic value for both sides of the transaction. So as always in these things, there's always different structures, but we've come down on one that we feel is balanced and provide, as Guillaume said, provides value for both sides. In terms of the OPAL question for minorities in the future, again, I don't think we'll take that question today. That's not something that we're going to talk about. And then in terms of the overall EBITDA guidance, I think, again, I think you can get a view. We've been talking quite specifically about Telesign, I think there's public market numbers on Telesign from the SPAC. I think we've been super pleased, as you know, in terms of their delivery against that plan, and we don't see any slowdown in that delivery. You can -- you've got our synergy view, and Route Mobile gave guidance as well. So I don't think it's super difficult to get to what that could look like.

Can I ask a quick follow-up? So just to confirm, no change in the Telesign guidance today, I'm presuming from what we heard, I believe, at the CMD, the last time. And just very quickly, if the [ EUR 300 million ] reinvestment from the founders in the later date, is that sort of set in stone? Or could -- is there some conditions in there that could change?

Go, Guillaume.

You were probably going to say something, so...