Sarantel IPO values company at £43 million pounds

Sarantel (SLG.L), the subject of a Due Diligence article in The Chilli published in March 2004, has successfully floated on the London Alternative Investment Market (AIM). The company raised approximately £16.7million (net of expenses) through a placing by Arbuthnot Securities of 21,951,220 ordinary shares at 82 pence per share. The share price rose by more than 50% on the first trading day, due to renewed interest by institutions and numerous VCTs – which now get special tax breaks by investing in AIM listed shares. The shares on AIM will represent approximately 42 percent of the enlarged share capital of the company following admission, while existing VC investors who didn’t sell any shares at this stage will jointly own around 51.2%.

The company was founded in 2000 by Oliver Leisten, the current CTO of Sarantel, as a carve out from Symmetricom Inc. Sarantel designs, manufactures and sells patented ceramic filtering antennas into the predominantly GPS (global positioning system) market for mobile phones and PDAs. The US government has mandated (E911 directive) that all mobile operators are able to locate emergency calls from mobiles within a small location. Sarantel has successfully demonstrated its GPS solution with a large US operator.

Sarantel had customer traction with over 50 design wins in a wide range of applications in fire, safety, navigation and personal safety and security in care management, and was generating revenues over the last three years. In the year ending September 2004, it generated £839,000 in revenues with an operating loss of £ 3.9 million, which gives it an extraordinary multiple of sales to enterprise value of over 51.

This reflects market expectations of a steep revenue projection from its existing customer base and design wins in the high growth mobile GPS and wi-fi market, as well as a robust patent portfolio. Sarantel expects sales to accelerate rapidly, as it has seen increased level of orders in the current financial year and strong interest from the nascent satellite radio market in the US.

The company plans to use the IPO proceeds to enter the highly competitive wi-fi, 3G and Bluetooth markets with new products, as well as bring on extra manufacturing capacity. The current manufacturing capacity is fully utilised and cannot fulfil future customer requirements.

The company had previously raised a total of £14 million from a group of VC and VCT investors, which includes Foresight VCT, TriVest VCT, eTechnology VCT and MTI Partners, prior to the AIM listing. MTI partners and Foresight VCT will remain significant shareholders with 21% and 17 % share of the enlarged share capital respectively. Existing shareholders and directors have shown extra confidence in the company and will hold on to their shares for a 36-month lock up period. eTechnology has warrants to subscribe to an additional 900,000 shares at 33p.

The current 44 employees of the company have combined options to purchase up to 8 million shares, at prices ranging from 10p to 27.5p over the next 10 years, although they have agreed to a lock-up period of 12 months. By that time, the share prices will reflect whether the company has been able to successfully execute its short term plans and meet its goals of reducing the average selling prices of its antennas, launch new products, increase plant capacity and accelerate the revenue trajectory curve.

The market is signalling its confidence in the ability of the recently strengthened management team to meet these goals.

The good news is that investors are slowly regaining confidence in the technology sector and have started to invest at handsome multiples and valuations. This will spur more companies to re-accelerate their exit and floating plans. We also expect renewed interest from VCTs and VCs to start investing in more early stage companies in order to increase the gene pool.

© Chilli Publishing Ltd 2005

03MAR2005