Summary investment memorandum

This is an opportunity to invest into an Italian leading IT business active in the distribution of value-added IT solutions for businesses and in the supply of system integration services to SMEs.

Following the stock price decline in 2022 (-40%), market cap ranges around €1.7bn with revenue exceeding €2.8bn, €130m LTM EBIT and 7% cash earnings power.

The business highlights clear competitive advantages being specialized in the high value-added segment of the distribution (48% market share in the supply of Data Centre, Networking and Cloud/Enterprise Software services), leveraging on its double-sided positioning as privileged long-term partner of the major vendors and reference supplier of the customers (re-sellers, software houses and system integrators). The company benefits from scale advantages and entry barriers, in addition to strong synergies between value-added distribution and system integration.

SeSa exhibits a proven track record of success being able to post remarkable profitable growth (10y revenue CAGR 12% with growing margins) achieved also through bolt-on accretive acquisitions. In fact, SeSa's approach includes an aggressive M&A strategy, having completed 60 deals in the past eight years. The gap in digitalization of the Italian SMEs and a widely fragmented market represent the key drivers for further future expansion.

The high cash conversion and outstanding return on capital employed (currently exceeding 50%) demonstrate the business’s financial strength and efficiency.

The company is retained by a group of founders and long-term partners-managers assuring skin in the game and effective alignment of incentives.

An investor can benefit from the compelling current earnings power (7%). Reasonably projecting growth of underlying economics, the investment has the potential to compound at a 15% long-term rate.    

Introductory notes

SeSa is the reference Italian player in the distribution of value-added IT solutions for businesses (enterprise software solutions, cloud applications, data centre, advanced software, networking and collaboration) and in the supply of system integration services.

With €2.8m in revenues (10y CAGR 12%), it serves 35k customers employing nearly 5,000 people (doubled in the last 3 years thanks to multiple bolt-on acquisitions) and runs operations across Europe.

SeSa highlights a €1.8bn market cap, no net debt, with €130m EBIT envisaging a 13x trailing multiple.

Historic background

The business dates back to seventies providing IT services to domestic companies and then expanded by partnering with IBM in the distribution of infrastructures and software. During the 90s, SeSa took the domestic leadership position in IT distribution adding to IBM the other major international vendors (Cisco, HP, Dell, Lenovo, Microsoft and Oracle).   

In 2009, by figuring out the market trend and the central role of system integrators, SeSa entered the software and system integration business establishing Var Group offering IT services and business applications for SMEs. The move allowed to develop a business highlighting direct relationships with end-users which proved to be highly synergetic with the original core business of value-added IT distribution.

In 2020 the Group further enlarged its offer providing digital platforms and software to the banking sector through Base Digital Group.

SeSa’s businesses

COMPUTER GROSS (value-added distribution), with more than €2bn in revenue, ∼ 20,000 customers (software houses, system integrators and re-sellers) of which 2,000 abroad (mostly DACH Region) is the wholesale leader of value-added IT distribution in Italy having nearly 48% market share in the value-added segments of Data Centre, Networking and Cloud/Enterprise Software (64% share in the latter segment). CG offers a fully comprehensive bundle of services: logistics, financing, technical support to retailers (resellers and authorised dealers), installation and set-up, maintenance and education (labs). Products' offering encompasses the IT worldwide leading brands.    

The business leverages on long-term partnership with over 100 major IT vendors, its well-known brand, extensiveness of offer, competencies of trained personnel, a network of stores which are meeting points to present the technical solutions and strengthen relationships with re-sellers and end-users.

As far as the reference market is concerned, the IT distributor stands in the middle between vendors and resellers. Distribution was originally born for logistical reasons. Over the years, the role of distributors has expanded and evolved considerably, embracing the provision of services in the interest of the vendors and for the benefit of re-sellers and system integrators.

IT distribution has also shown itself capable of successfully facing and riding the challenge brought forward by the cloud. The feared disintermediation of distributors has not intervened: the ability of distributors to aggregate partners/vendors with different characteristics and skills around them is making a difference: supply chains and ecosystems have arisen around distributors, to which re-sellers and end-customers can turn to facilitate their transition to the cloud.

The distributor works with many providers in their respective markets and coverage areas. Sophisticated distributors have marketing and sales capabilities to bring vendor's products onto the market. Moreover, the distributors offer solution centres and showrooms that allow re-sellers and customer/partners to demonstrate products and capabilities to customers. Finally, they provide technical support, acting to resolve partner’s technical issues.

Distributors - especially in a market like the Italian characterized by an exceptional high number of SMEs and micro businesses - represent some vendors who do not have direct presence locally, dealing in all respects with the development of the channel and related support.

VARGROUP (system integration), with €0.8bn in revenue and operations across Europe (12.5k customers out of which 2.5k abroad), is the software and system integration business offering enterprise digital services to SMEs.

Services are offered according to the following verticals: Cloud Technology Services and Security Solutions (48%), ERP & Vertical Applications (35%), Digital Engineering (8%), Customer & Business Experience (3%), Data Science (3%), Digital Workspace (3%).

BASE DIGITALE GROUP (business services) is a €100m business employing nearly 100 people and offering digital solutions to the banking sector. Among the services are: design of back-office processes, outsourcing, process to manage security of assets. 

Competitive advantages and strengths

Leadership and strong competitive positioning:

• Focus on the value-added services of IT distribution. 48% market share in the reference segment with the second player at 15%. Visible 7% market share in system integration too, within a really fragmented Italian market (pursued aggregation via strategic M&A).
• Long-term partnership with major vendors. Keeping long-term business relationships requires specialised human resources, technical capabilities (that the vendor certifies) and competencies on the vendors' products and complex IT solutions that combine the offer of different vendors. Moreover, the distributor is required to deliver education sessions to the business partners (its customers) and pre-sale/after sale assistance to the end-users (the customers to the business partners).
• Scale: the size allows being a reliable partner and to do scale.

Considering the barriers in place, there are high switching costs. Distributors are assets to the vendor because they maintain deep knowledge of the local market(s) and take care of the relationships with the business partners and the end-users.

Synergic businesses that strengthen the group's offer: system integration is highly synergic to the core value-added distribution and SeSa caught this opportunity. VAR acquires products and solutions mostly from CG: it tailors and sells them to the end-users targeting SMEs.

Intensive accretive M&A (60 deals in the last 8 years) making SeSa a serial acquirer able to target and acquire companies with margins above legacy business. Management proves ability to attract and integrate skills and competences to support long-term growth. According to the management: “…We have really a great pipeline of new M&As, not only in Italy but also across Europe and in particular in Germany…” “…There is really great fragmentation in the system integration area for the business segment with a lot of opportunity to aggregate and propose proper long-term incentives to the key people with the same criteria that we already applied in Italy…”

Skin in the game: a group of founders-entrepreneurs and managers retains control assuring alignment of incentives. Current Chairman is the Founder Paolo Castellacci, Vice Chairman Giovanni Moriani joined Sesa since 80s while the CEO Alessandro Fabbroni is with the company since 2008. The business sectors’ managing partners have long-term equity incentives in place. Sesa's key people jointly control the holding being the majority stakeholder with 52.8% stake. ∼ 20% stake held by T.I.P. https://www.tipspa.it/en/, long-term financial partner since 2019 with shareholders' agreement in place.

The largest part of the remuneration of executive directors is in stock grants (mostly annual vesting + a portion with a 3-year vesting scheme) according to quantitative targets of financial performance.

Financial overview

SeSa posted an outstanding growth in the last years: revenue (€2.8bn) CAGR 2011-2023 +12% while EBIT (€130m) and EPS (€5.5) grew on average by 15%.

The results were achieved through both organic growth and bolt-on accretive acquisitions: deals with moderate EV/EBITDA's entry value incentivising the key people of the target companies via earn-out mechanism. 

The business highlights high cash conversion (80%) and outstanding ROCE in excess of 50% achieved through solid profitability profile and steady improving turnover.

The stock declined by 40% from the peak in correspondence with the downturn of the technology sector worldwide. As far as the valuation is concerned, current net earnings power (nearly 100m) assures 6% return. I guess the market price represents a fair entry point for a leading business and successful aggregator that it is positioned to continue in its trajectory of sustained organic growth leveraging on the huge digitalization opportunities In Italy and Europe.   

Appendix 1: historic financial data