Stofa in brief
Stofa is a Danish operator within broadband, cable TV and telephony which in 2012 provided approximately 375,000 households with cable TV and broadband. In 2010, Stofa was Denmark’s second-largest supplier of cable TV and the fourth largest for broadband.
Ratos’s investment case
At a first glance in 2010 Stofa could look less than attractive as an investment with a slowing earnings trend and falling operating margin. The company was well-invested in terms of technology and networks to enable it to achieve high quality and capacity. On the basis of Ratos’s knowledge of the sector and due diligence of the company, potential for value creation was identified by defining a new and clear strategy which mainly involved simplifying operations, simplifying the offering and focusing on end customers – a repositioning that would lead to good exit potential through the company’s strategic value and stable earnings.
Ratos’s active ownership
The key goal of the new strategy was primarily to increase profitability through a number of initiatives: create growth within the existing customer base (particularly broadband customers), better utilise the company’s negotiating position with suppliers and major customers, strengthen financial governance in order to achieve cost efficiency, and improve the efficiency of the organisation, particularly customer service. Stofa’s strong corporate culture characterised by a high degree of loyalty among employees and strong customer orientation, offered unutilised potential.
Further investments within both technology and networks were made to prepare the company for the TV and broadband market of the future with the aim of Stofa providing the market’s best TV experience for digital boxes, web and tablets. The quality of the network was demonstrated among other things by Stofa being ranked by Netflix as Denmark’s best broadband operator.
In order to implement this strategy a new board was recruited and a new CEO, Klaus Hoeg Hagensen. Klaus had a background from the newspaper world, a sector that has undergone major change processes with several parallels to Stofa’s operations, including factors such as the sales model with subscription sales.
How an IRR of 54% (60% in Danish kronor) was achieved
During Ratos’s ownership the number of existing broadband customers increased from 145,000 to 180,000 and profitability improved markedly (operating margin rose from 9.5% to 11.5%) through higher sales, efficiency improvements and reduced costs. Growth and profitability were also improved when Stofa acquired parts of the Danish cable TV operations in Canal Digital in 2011, with major synergies. Between 2009 and 2012 the company achieved an annual sales growth of 9%, of which organic growth was 7%. Cash flow improved significantly due among other things to better handling of accounts receivable. As a result of the favourable development in the company a refinancing could be carried out at the end of 2011 and Ratos received a dividend of DKK 425m, i.e. 80% of the initial investment.
Ratos signed an agreement to sell Stofa to SE in October 2012. Stofa was then a better run and better invested company where the many investments and changes carried out in 2010-2012 were expected to continue to provide a good earnings trend in the years ahead. The selling price took this into account. The sale was made at an EV/EBITA multiple of over 12, compared with approximately 11 at the acquisition in 2010. The company continued to perform very well during 2013.
Facts about the investment
Investment year: 2010
Sales (DKKm): 1 024
Reported EBITA (DKKm): 92
Exit year: 2012
Sales (DKKm): 1 344
Reported EBITA (DKKm): 155