Melbourne IT sheds the fat, sells consultancy division for $152.5 million in cash

IT services giant Melbourne IT has stripped the fat following a strategic review of the business, announcing yesterday it would sell the company’s Digital Brand Services division to an American firm for a massive $152.5 million in cash.

The sale is a stunning turnaround for the company, with the total sales amount on par with the company’s market cap of $160 million. This morning, shares in the company have surged 16.9% to $2.28.

The announcement comes a few months after Melbourne IT, which is also the country’s largest domain name registrar, said it would embark on a strategic review, following an aggressive few years in which it acquired several bolt-on, smaller businesses.

The Digital Brand Services division, among its consultancy operations, offers domain name management, brand protection and search optimisation services. It will now be sold to American group Corporation Services Company.

Speaking to SmartCompany, a spokesperson for Melbourne IT said the deal was “compelling”.

“We believed the market hadn’t properly valued our business, and the strategic review was instigated so we could have a more focused business.”

“I think we’ve achieved that by unlocking shareholder value and creating a more streamlined business.”

The division of the business was created in 2008, when Melbourne IT combined two separate parts of the business. In a statement, the company said the sale proves significant growth in value – and represents a valuation of 16x the division’s 2012 earnings before interest and tax.

Chief executive Theo Hnarakis said while the business wasn’t earmarked for a sale, “this was an opportunity which could not be ignored”.

“Management and the Board are now concentrating on updating the strategic plan for the business following the divestiture so we can provide clarity to shareholders before the AGM in May,” he said.

The sale follows a tumultuous few months at Melbourne IT.

Back in November, the company said it would downgrade full-year earnings for the year to December 31 by 10%. The next day, shares fell by 10.9% to $1.55.

Melbourne IT attempted to diversify over the past five years, acquiring several smaller businesses. But analysts suggest that strategy is spreading the company too thin. Warning signs appeared as early as the first few months of 2012, when software developer Reckon sold its 5% stake in the group.

Proceeds from the sale will be realised in the 2013 financial year, the company said.