Sage bets on Brazil with £125m acquisition

Sage Group has broadened its foothold in Brazil with the acquisition of a majority stake in Folhamatic Group, a provider of accounting software for small businesses.
 
The UK’s largest listed software group by market capitalisation said it had agreed to pay £125m for the 75 per cent stake, with the remainder of the Folhamatic’s equity retained by Mauricio Frizzarin, the Brazilian group’s founder and chief executive.
 
Mr Frizzarin will stay on to run the business, which is one of the country’s leading accountancy software companies and generates cash through subscriptions.
 
Although Sage already owns one minor business in Brazil, Wednesday’s deal – which values Folhamatic’s equity at £191m – is the FTSE 100 group’s first significant move into the Latin American country.
 
The valuation equates to three times Folhamatic’s 2011 revenues and 13.4 times its earnings before interest, tax, depreciation and amortisation – a price that Julian Yates at Investec said was “very expensive”.
 
However, the acquisition was “strategically sensible for Sage, with Brazil being an attractive and relatively under-penetrated market”, he added.
 
Paul Harrison, Sage finance director, defended the multiple paid, and said: “This is a high growth business in an exciting market. When you compare it with other technology businesses in that market, the price is reasonable.”
 
Sage said it was attracted to the Brazilian market because roughly 90 per cent of its small and medium-sized enterprises are yet to utilise business software.
 
Brazil has complex tax regulations, which bolsters the need for accounting software such as those provided by Sage.
 
The acquisition is part of a move by Sage to broaden its revenue base following criticism for being slow to get into internet-based software.
 
“Diversifying out of North America and western Europe is something that has value in the long term for us,” said Guy Berruyer, Sage chief executive.
 
Sage said the acquisition would be immediately earnings accretive and that it expected the Brazilian business to more than double its ebitda between 2011 and the end of 2012. The shares rose 5 per cent to 265.5p.

(Mark Wembridge | ft.com)