The regional markets pulled in strong gains yesterday but the STI underperformed and ended 0.1% lower. The local index was dragged by SingTel which plunged 0.9% after announcing its decision to acquire a US Cyber-Security company, Trustwave, for US$810 million. SingTel has the second largest weighting in the STI.

Macquarie Equities Research (MER) has an ‘Outperform’ rating on the shares with a 12-month target price of $4.76. This is a 8.7% increase from SingTel’s closing price of $4.38 yesterday…
 
What is Trustwave
 
Trustwave is the largest independent managed security services provider in North America with presence in Europe and Asia Pacific. Its broad portfolio of services includes threat management, vulnerability management and compliance management. The company strives to help industries protect their IT infrastructure, applications and networks and respond to cyber threats.
 
Synergies after acquisition
 
In a SGX announcement yesterday, SingTel CEO said he is pleased with the acquisition as it is in line with SingTel’s objective to grow its offering in cyber security. He said that “the company’s extensive customer reach and strong suite of ICT services, together with Trustwave’s deep cyber security capabilities will create a powerful combination and allow SingTel to capture global opportunities in the cyber security space.”
 
Post acquisition, Trustwave will continue to operate as a standalone business unit and strengthen its position in US and Europe. However, the IT company will also leverage on SingTel’s market presence in the Asia Pacific region and grow its market share there.
 
This move comes as SingTel is moving away from being a pure-play telecoms company and pursues expansion in areas such as “digital life”. This includes mobile video, digital advertising and cyber security.
 
Financial impact on acquisition
 
Excluding the deal yesterday, SingTel has spent about US$663 mil on acquisitions since 2012, mainly to build its digital life business. This acquisition is to date the largest acquisition SingTel has made, outside the main telecoms sector.
 
Based on the press conference, the enterprise value of Trustwave is US$850mil and SingTel will pay $810mil for a 98% equity interest. The other 2% will remain with Robert J. McCullen, who is Trustwave CEO. The transaction is expected to be earnings before interest, tax, depreciation and amortization (EBITDA) positive from the second year of acquisition, and earnings accretive from the third year on.
 

Source: Macquarie Research - 9 Apr 2015