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Route’s promoters (who together own 57.56% stake) have announced plans to sell their entire stake in the company to Proximus Opal SA (Proximus), a Belgium government-backed digital communications group. Proximus has business interests in CPaaS and digital identity (DI) space through a wholly owned entity ‘Telesign’. The deal effectively values Route’s entire equity at ~INR 103bn (or INR 1,626.4 per share), implying FY24/25 PER valuations of 26.5x/22.8x, respectively. Post the deal’s consummation, Rajdip Gupta, current MD & CEO of Route, will continue in his existing role, in addition to leading the CPaaS activities of Proximus. While the exact details remain hazy, given the highly complementary product portfolios of Telesign and Route, we believe the deal could create significant revenue growth opportunities for the latter through cross-selling efforts. While we expect more details to emerge as and when Route reports its 1QFY24 results, we continue to retain our ‘BUY’ rating basis expectations of strong organic growth trajectory and reasonable valuations.

* Deal contours: Proximus will acquire controlling interest (57.76%) in Route from the existing promoters for a cash consideration of ~INR 59,224mn (~EUR 643mn). Subsequent to this transaction, a mandatory takeover offer will be triggered that will require the acquirer to also purchase up to 26% stake at the same acquisition price (i.e., INR1,626.4 per share) from minority investors. It’s pertinent to note here that the Proximus management has categorically said that it has no intention to delist Route pursuant to the mandatory takeover offer, even if it ends up owning ~84% stake in the target company. Route’s existing promoters on the other hand will re-invest ~EUR 300mn to acquire ~14.5% interest in Proximus (Route’s new majority shareholder). The deal is expected to conclude within 6-9 months, subject to regulatory approvals

* Route may benefit through revenue synergies: Post deal conclusion (including takeover offer), Proximus will own 58-75% of Route in addition to 100% stake in Telesign. Proximus claims product offerings and geographic footprints of Route and Telesign are highly complementary, leading to estimated annual run-rate EBITDA synergies of at least EUR 90mn (to be realised within 3 years post closing) for both companies. Cost synergies are likely to contribute ~75% to this, leading to combined EBITDA margin of 13-15%. As Route already operates at 12%+ EBITDA margin while Telesign was just about break-even in CY22, we expect a majority of the cost synergies to be derived by the latter. On the other hand, we expect revenue synergies to be higher for Route due to its strong mobile operator partnerships across geographies. On its part, Route’s management believes the partnership with Telesign will pave the way for Route to achieve a billion-dollar annual revenue run-rate earlier than the expected 3-4 year timeframe.

* Combined entity to create third largest player in messaging volume terms: According to the Proximus management, Route and Telesign combined on a pro-forma basis will have annual revenue of EUR 900mn. This will propel the combined entity to becoming the world’s third largest player in messaging volume terms. This could be positive for Route as scale offers better negotiating power and also helps differentiate vs. competition.

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