LONDON: Gamma Communications plc, a leading technology-based provider of communications services, announced that it has acquired 80% of the issued share capital of HFO Holding AG (HFO) on 1 July 2020, and has an option to acquire the remaining 20% over the next three years. The acquisition is expected to be earnings enhancing immediately from completion.

The initial consideration for the acquisition of HFO is €20.4 million for approximately 80% of the shares.  Gamma has an option to purchase the remaining c20% of shares in two tranches of c8% in 2021 and 2022 (where the consideration will be based on the results of the preceeding financial year) and one final tranche of c4% in 2023 (also based on the results of the preceeding financial year).

This additional consideration will in aggregate be between €7.5m and €17.5m and will be payable in cash.  The upper end of the option price will only be achieved if HFO achieves challenging growth targets related to its IP telephony business.

As part of the transaction, management has agreed to re-invest approximately 17% of the cash proceeds it will receive from each tranche of the additional consideration into Gamma shares which will then be “locked up” for two years after each re-investment.

Gamma has previously stated its ambition to build on its success in the UK UCaaS market by expanding into Europe.  Gamma acquired DX Groep in the Netherlands in October 2018 and expanded into Spain through the acquisition of Voz Telecom in April 2020.

It is now expanding its European footprint further into Germany through the acquisition of HFO.  The combination of the Cloud PBX markets in Spain, Netherlands and Germany is over three times the size of the UK market with conversion rates from legacy PBX products to Cloud based products generally being much lower in mainland Europe.

These countries are following a similar cloud telephony migration path to the UK, providing Gamma with a significant opportunity to leverage its capabilities and know-how to build leadership at a critical time in the development of this large continental growth market.

HFO is one of the leading SIP Trunk providers in Germany with an excellent reputation for product quality and end-customer service.  It has a strategy to build on this expertise in both the VOIP and broad business communications markets, and has recently started to sell Cloud PBX offerings through its extensive network of channel partners across the German market.

As part of its stated European expansion strategy, Gamma had previously identified Germany as a key target geography. With an overall market of c.36 million PBX seats (almost twice the UK market size) but a cloud penetration of only c6% (one of the lowest rates in Western Europe), the German market for cloud telephony is forecast to grow rapidly.

Gamma believes that it can use its commercial strength and expertise of developing and selling a market leading cloud PBX solution via the channel to accelerate HFO’s growth in the emerging Cloud PBX market in Germany.  In the UK, Gamma has been able to convert a strong presence in the SIP Trunk market into a market leading presence in Cloud PBX.  Gamma’s team will work with the experienced management team from HFO to replicate this success in Germany.

Like Gamma, HFO sells to end users directly as well as indirectly through a network of wholesale partners and dealers.

HFO also provides B2B mobile services through its well-known Epsilon brand with over 100,000 connections per year that are sold through its resale partner and dealer network.  This presents an opportunity to sell a mobile based Cloud PBX product through this well establshed channel, where HFO has an excellent reputation for customer service and delivery.

Andrew Taylor, Gamma’s Chief Executive Officer, commented: “The acquisition of HFO provides Gamma with a fantastic opportunity to enter the German market – one of the largest but under-penetrated Cloud PBX markets in Western Europe.  We warmly welcome all of HFO’s staff and customers into the Gamma family and we look forward to working with them.”

Achim Hager, CEO of HFO, commented: “We are delighted to be completing the move to Gamma and see this as the next step in the development of our business.  We believe that we can combine our experience of the German market with Gamma’s experience of taking Cloud PBX into the channel to develop a leading Cloud PBX business in Germany.  It is great to have found a partner with similar values and approach.”