Telecoms sale puts Spice on recovery road

SHARES in Spice surged more than 10 per cent yesterday after the utility services company took its "first major step" to recovery by selling its telecoms business for £32.8m.

The deal, hailed by an analyst as "very good news", was at the top end of analysts' 20m to 30m range.

The Leeds-based company, whose work ranges from pinpointing unbilled properties to installing water meters, is selling Team Telecom Group to a management team backed by private equity firm Gresham.

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Shares in Spice rose 10.7 per cent yesterday, adding 4p to close at 41.5p. From a low of 27.5p touched late last month, shares have risen by more than 50 per cent.

Following months of downgrades and falling shares, interim chief executive Martin Towers said he believes the City is at last beginning to view Spice fairly.

"The sentiment is changing," he said. "As we start to move over the milestones, then people will respond positively.

"This particular transaction is one that has a very beneficial effect on reducing our borrowings.

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"It's a move in the right direction as far as the whole strategy is concerned."

Under the terms of the deal, Gresham will take on 7.3m of its debt and other liabilities. Cash proceeds of 25.5m will be used to repay Spice's bank debt. Combined with a 4.9m overdraft, the deal will reduce Spice's net debt by about 30.4m before expenses.

Debt will be reduced to about 87.6m from 116.5m last October once the deal is rubber stamped by shareholders.

Mr Towers has set a strategy of getting net debt down to no more than two times underlying earnings (EBITDA). "This a major step forward in realising that objective," he said.

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Analysts at Liberum Capital estimate net debt will be 2.2 times EBITDA by May 2011.

Spice added the company is trading in line with expectations. The group is also reviewing the future of its gas and facilities management arms, which comprise the rest of its public-facing distribution business. Analysts believe a disposal of its loss-making gas business will be next.

Under Mr Towers' stewardship, Spice is concentrating on organic growth after years of acquisitions. It bought ComGroup, a major part of the telecoms business, for 6.9m just nine months ago.

The telecoms business, which is based in Derby, is comprised of four businesses and has divisions in Australia, Middlesex and Wales. Its customers include British Airways and Anglian Water and its work includes supplying and designing mobile radios or walkie talkies. It made profits of 1.7m on 16.4m revenues in the six months to the end of October.

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Gresham partner Mark Blower, who heads the firm's investment business in Yorkshire and the North East, said it first approached Spice two years ago to buy the telecoms business.

"We see it as a fair price and I think Spice have got a fair price as well," said Mr Blower, adding management will take a minority stake. "Each of the individual business has very strong niche market positions. There's a superb management team too."

Analyst Nick Spoliar at Altium Securities said: "This is a better price than anticipated and will enable Spice to pay down debt... We remain cautious on Spice, bearing in mind the continuing losses in gas."

Analyst Geoff Allum at Arden Partners said: "This disposal is very good news. It will both lower debt and show that the company is determined to get back to its core businesses... The shares should be bought."

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A team at Ernst & Young in Leeds advised Spice on the sale.

Mergers are back on agenda

The new owner of Spice's telecoms business, private equity firm Gresham, sees a resurgence in mergers and acquisitions.

"We are definitely seeing the market warming up now," said Gresham partner Mark Blower, who formerly worked at Lloyds Acquisition Finance and Rothschild.

Mr Blower, who focuses on deal origination and investment in Yorkshire and the North East, said deals are particularly focused around companies selling non-core businesses, and lenders looking to offload equity stakes following debt-for-equity swaps.

"The Yorkshire region is pretty productive at the moment," he said.

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