Tapping the rich
Tuesday, February 13, 2007/
Patrick Flannigan and his partners so enthused tycoon John Gandel about their company’s prospects, he made his first investment outside property. Gandel’s name on the register was a magnet.
Patrick Flannigan, Russell Small and Adrian Field
Claim to fame: Raising finance from the very rich
By Amanda Gome
Service Stream has appeared on the public’s radar after it recently won the $12 million contract to run the Federal Government’s anti-spam ‘Do Not Call Register’.
But the untold story is how Service Stream has raised $22 million over the past three years, much of it from Australia’s wealthiest families.
Patrick Flannigan tells how they did it.
Three years ago, Adrian sat down and said, ‘Here is the business plan’, and handed around a blank A4 piece of paper. They had bought a shell of a company in 2004 for about $2 million and we were looking for something to put in it. Skilled Group wanted to divest its communications service business so we bought it for about $12.8 million.
The idea was to build an end-to-end service business. There was huge change happening in the telecommunications industry and we believed the major telcos would have to outsource much of their technical services. It worked. We won a couple of large contracts from the telcos because of our bundled solutions pitch. We would take a call from a customer who wanted to have their broadband put in, dispatch a technical person to do the job and then deliver all the components to carry out the job.
John Gandel was first on board…
We had to raise was $11 million to fund the growth so we issued a prospectus. We did 30-40 presentations to people but that was OK: the more you do, the more you learn. What really helped were private equity connections who put us in contact with John Gandel. While we dealt with his analysts, we did have a one-hour meeting with him. He bought 12% of the company for almost $4 million.
It was very exciting and a real coup getting Gandel. It was the first investment that his family investment group had made outside property. Once we made it public, the financial markets took note that his name was on our register. We also had lots of friends and family put in money which was great because they have done really well out of it. (Shares were issued at 20¢ three years ago and are now trading at $1.70.)
In March 2005, we did a second acquisition: the operating business of Pracon, a dot-com bomb with a share price that had peaked at $2.72 in 2000 but had fallen to 3¢ in 2003. It was a very complementary bolt-on acquisition: having management systems and structures plus a 450-seat call centre. Better still, its main customers were Optus and Vodafone. So we had three companies (including Telstra) on long-term contracts in just two deals!
We didn’t have to raise capital for that fund-raising as our bank, Westpac, stood behind us and helped fund the acquisition. Once the acquisition was completed, though, we set out to raise another $11 million.
We now had a substantial business and lacked the time for fund-raising that we had when we were starting up. We also wanted to broaden the base of the share register. So instead of doing it ourselves, we got Bell Potter on board to help raise funds.
The Myer family was next
We had to pay them the normal fee of about 2-5% of money raised but it was worth it. We got funding from the Myer family, Monterey Investments (a Melbourne institution), the Thorney Group (the Pratt family) and Wilson Asset Management.
They were all pretty straightforward deals to get. I would go along with my CFO and usually a 20-page document. The analysts ask similar questions: What are the earnings? Are they sustainable? Can you grow them? But ultimately they are investing in the people; they want to invest in you. They want to hear a good story. Sometimes they are helpful and ask: Have you considered this opportunity?
Before the second acquisition, the company had revenue of $100 million. Last year we did $180 million and this year $300 million with an EBITDA of $27–30 million. We expect both revenue and EBITDA to increase by 20% next year (2007-08). Our market capitalisation is $260 million.
Our next step?
To take what we have done in telecommunications and replicate it in the utilities industry. We are looking at a joint venture in India: there is going to be a huge roll out of wireless and telecommunications infrastructure but we will be funding that internally.
Smart meters also present a huge opportunity. Every electricity meter in Australia will have to be changed over to Smart meters and that is a lot of work for someone … and is right in our sweet spot. We will be able to fund that internally too.”