Broker snap: K3 deal offers cross-selling opportunities

The latest acquisition by Microsoft based business solutions provider K3 Business Technology should be earnings enhancing and drive growth in recurring revenues, Edison Investment Research reckons.K3 has acquired certain assets of FD Systems Ltd, specifically its Sage 200 business unit, for a total consideration of £1.25m. The deal adds around 330 Sage 200 customers to K3's existing customer base, Edison notes, and opens up the opportunity for some cross selling.The research house has revised its forecasts for K3 as a result of the acquisition, bumping up forecasts revenues by 2.2% for fiscal 2011 (FY11) and by 3.7% for fiscal 2012 (FY12). " We estimate that the deal will be earnings enhancing, driving increases of 2.3% and 4.2% respectively to FY11 and FY12 normalised earnings per share. We estimate the deal will increase K3's net debt position from £11.5m to £12.8m at the end of FY11 and £8.0m to £9.0m at the end of FY12," Edison said.Based on these revised estimates K3 trades on a price/earnings multiple "towards the low end of its peer group". "We believe that K3 can continue to re-rate if it can successfully integrate recent acquisitions and cross-sell hosting services to the newly acquired customer bases," the research note concluded.