UK-listed language services and technology provider SDL on July 16, 2018 announced the acquisition of Donnelley Language Solutions (DLS) for USD 77.5m, a unit of Chicago-based and New York-listed Donnelley Financial Solutions.
The acquisition marks the first major acquisition under the leadership of CEO Adolfo Hernandez, who was appointed in March 2016 and whose first order of business was to dispose of a number of non-core businesses.
DLS employs approximately 400 people and is the language services arm of Donnelley Financial Solutions (DFS), which was spun off from printing giant RR Donnelley in 2016. DFS had recently come under fire from investors unhappy with the declining share price.
Valuation in Line
According to a regulatory filing by SDL, DLS generated 2017 revenues of USD 71.4m and an adjusted EBITDA of USD 5.8m. At 13.3x EBITDA, the acquisition is in line with other large language industry acquisitions tracked by Slator. In late 2017, RWS paid 11.8x EBITDA for Moravia.
What attracted SDL to DLS is its focus on “premium industries and regulated content”. In fact, under the label “premium verticals”, SDL made its business in life sciences and marketing solutions a core KPI, on which it regularly reports. In 2017, the company said revenues in these markets grew from GBP 22.5m in 2016 to GBP 40.1m last fiscal year. SDL said client overlap is minimal with “only approximately USD 3m of DLS’ revenues in FY17 generated with clients that are also clients of SDL”.
Buying into Premium Verticals
With the Donnelley acquisition, SDL gives its Life Sciences business a boost while also becoming a much stronger player in Financial Services, a market worth an estimated USD 1.1bn according to the recent Slator 2018 Financial Industry report. According to SDL, Financial Services and Life Sciences accounted for 38% (about USD 27m) and 32% (USD 22m) of Donnelley’s 2017 revenues, respectively.
The deal also provides SDL with new locations in the financial hubs of London, New York and Hong Kong, as well as a 100-person office in Madrid. SDL announced it will “optimise its geographic and facilities footprint”, which will likely result in the closure of duplicated locations.
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Hope for Margin Expansion
Furthermore, SDL hopes to widen gross margins at DLS by using more machine translation, bringing more human translation work in-house, and rolling out its Helix program. At 35%, DLS’ gross margins are 5 percentage points below SDL’s Language Services segment.
SDL said Christophe Djaouani (Senior VP and Managing Director of DLS) and Nicolas Bosovsky (VP and Managing Director – Global Operations), who have led DLS for over a decade, are expected to join SDL as Senior Vice President and VP, Operations respectively.
Interestingly, SDL’s statement contained no mention of MultiTrans, DLS’ translation management system, which competes directly with SDL’s technology offering. Slator will provide follow-up coverage and address the issue.
Holding on at the Top
Overall, the acquisition makes sense for SDL, which has struggled to grow its language services business over the past half decade, and has seen rivals such as TransPerfect and RWS notch up double digit growth rates either organically or through M&A. The deal also shifts the balance of SDL’s revenue base decidedly towards the services business, which will account for about 70% of SDL revenues post-DLS acquisition.
SDL will finance the acquisition through a mix of new debt and by tapping the market via a share placement expected to net the company GBP 36.2m (USD 47.9m). So far, the market’s reaction to the acquisition and SDL’s guidance that the outlook for 2018 continues to be “in line with management expectations” has been muted with SDL shares up marginally at the time of writing.
Image: SDL CEO Adolfo Hernandez at SlatorCon Zurich 2017.
Correction: An earlier version included a wrong purchase price. It is USD 77.5m and not 71.4m.
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