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Acquisition trail: Intellego Holdings plc

Friday, November 28, 2008

When Home Information Packs were introduced to the UK residential property market halfway through 2007, the confusion it caused among estate agents threatened to disrupt the entire industry. In a matter of weeks, agents needed to be qualified to advise home sellers on how to comply with the new laws, but getting them trained wasn’t going to be easy

For Angus Forrest, the chairman of AIM listed e-learning software specialist Intellego Holdings plc, it was a golden opportunity. His company is adept at supplying training to companies and industries where compliance and the need to keep up with changing regulation are critical.

In the event, Intellego worked with seven of the top ten HIPs providers and trained 3,600 agents in the Rightmove network in just two weeks.

In a market saturated by suppliers, Intellego’s progress in business training has been notable. Established in 2002 and listed on AIM in 2004, the company has since seen a change of management and a change of emphasis towards delivering anything from big-hitting, custom built packages to smaller components and platforms.

Last week the company posted sales figures for the six months to September 30, 2008, which were up 50% to £1.1 million with pre-tax losses cut to £118,000 from £149,000. It is currently valued at around £1.2 million.

For Forrest, the figures reflect an effort to build scale in the business, concentrating on niche verticals and making sure that catalogues of software are available to attract the biggest corporate names. An active acquisition strategy has played a big part so far, and is likely to shape the business in the future.

“There is a myriad of smaller unquoted businesses out there,” he says. “Now we have done four acquisitions I think we can go for slightly bigger fry, and that will be one of that ways that we grow.

“One of our strategies was to grow the company as quickly as we could but also try to grow it as organically as possible. What we are looking for now are new sectors and ways to build our expertise in existing markets.”

Acquisitions

Intellego’s acquisition trail dates back to December 2006 when it snapped up eMedit Ltd for £50,000 in shares. The two companies had worked together previously on joint sales initiatives and the deal gave Intellego a specialisation in the health, medical and pharmaceutical markets. It also meant that rather than outsourcing the production of content to third parties, all that work could now be done in-house.

Nearly 12 months later it swallowed up Copia Ltd, a retail training expert, for £90,000 in cash and shares, whose customers include the high street pharmacy and beauty chain Boots.

This year two other businesses were bolted on, including The Professional Development Partnership Ltd, which specialises in financial services training and Zenosis Ltd, which owns a library of pharmaceutical content.

For Forrest, the criteria for acquisitions hinges on selling regulated e-learning products to organisations that are obliged to adhere to statutory or regulatory requirements year after year.

“That is exactly what we want because of the renewal income it gives us,” he explains. “There are also significant barriers to entry because unless you have got a reasonably full library of content people just can’t enter the market.”

As a result, Intellego now employs around 30 staff and is growing at approximately 70% per year. Its traditional blend of class room, instructor-led training and e-learning is now leaning very much towards simply e-learning. Forrest believes the market has moved in that direction as corporates have got used to the advantages of offering training in ways that are often cheaper, more convenient for employees and in some ways more effective.

“We sell to medium and large organisations which need compliance management or change of business process software,” he says. “Because you can’t really stop training completely I would say that we are well insulated from what is happening in the wider economy. As big firms merge they need to align their systems and there are a lot of opportunities for us there.

“One of the benefits of e-learning is that it is cheaper than other methods, particularly when you need to train distributed workforces,” he adds. “We’ve got clients such as Boots, Specsavers and 3 Mobile, who all benefit.

“The market for training is enormous and is being driven by increased regulation and compliance. There are demands for better staffing and better measurement, so talent management is an area which is growing.”

Credibility

By mopping up at the smaller end of the market, Intellego has also been able to make a big impact with its acquisitions. In the case of Copia, Forrest reckons that having a larger, AIM listed company behind it means the smaller outfit has ramped up sales by 50% in just eight months. Forrest believes the presence of a larger organisation settles the minds of purchasing managers and adds valuable credibility.

“The biggest advantage of being on AIM is that we are perceived as being more like our customers, the credibility it gives us if very important,” he says.

“In the last six months I have probably seen 12 businesses which we could buy, and we have already had some sort of trade with almost all of them. That is a big plus for us because if we have traded with them we have at least got some idea what is going to happen next.

“But each acquisition has got to offer value for money. We aim to get our money back within 12 months and in that respect smaller businesses are going to be easier than larger business – although we have to put more effort into a smaller business.”

Any future deals will inevitable push Intellego into new industry verticals or expand its current expertise. Forrest is keen on the food sector – where a large, dispersed workforce and a mountain of impending compliance could spell big opportunities. He is frustrated by unrealistic prices being asked by sellers, but remains confident that deals can be done.

Away from acquisitions, he is also upbeat about a range of developed – but not yet launched – generic products. He believes that where Intellego has made its name developing custom packages for clients, some of these could be rebranded or changed slightly to appeal to a wider audience.

“I see the best opportunities for us in developing our own courses in specialist fields which are difficult for others to enter – pharmaceuticals being the first one,” he says. “There are 400 companies connected to that market that could buy from us, so that’s a big opportunity. Food training would be another one.”

In the longer term Forrest is committed to a two-pronged approach to developing the business and delivering value for shareholders. “The first is scale, because without scale you can’t be expected to do very much,” he says. “Then it is profit and cash generation, because once you become self determining then every decision is much easier and much less risky. Those two single objectives are the creators of value for your shareholders. I’m feeling very positive about Intellego and believe we can become a substantial company.”

Ben Hobson, SmallCapNews.co.uk