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Berkshire bigboy 2e2 in the pink - apart from crushing debt burden

Amphibious workforce gets its feet wet

Integrator 2e2 recorded steep losses in calendar 2011 caused by crippling interest repayments, discontinued operations and restructuring costs, but despite all this, some progress was made in the underlying operations.

The privately held Berks-based firm, which pushed out the numbers in a glossy annual report, made a net loss of £8.4m compared to a loss of £9.1m restated a year earlier.

The firm was forced to restate numbers last year as historically it has recognised revenues at the point of a contract award. But as they grew larger in size, Ts&Cs took longer to negotiate – so 2e2 decided it would only include the sale when the contract was established.

The integrator reported group operating profits of £20m, up more than 51 per cent from the £13.2m a year ago, but took a £3m hit on ending a biz line, £3.5m for "fundamental restructuring" and a massive £20.8m from interest payable on a £152.7m bank loan that the firm had taken out to pay for acquisitions over the years.

During the year 2e2 sold its specialist change management consultancy Xayce to Capita and its Dutch software integration biz was offloaded to a local services group in the Netherlands.

The restructuring costs related to the integration of Morse, acquired back in 2010, as well as to payments going towards the redundancies of certain support staff as 2e2 began to off-shore roles to Indian outsourcer Patni.

Group revenues for the year came in at £404m up 24 per cent on 2010 but extracting the Morse acquisition (2e2 and Morse had combined revenues of £414m in 2009), organic growth was limited to one per cent.

Chef exec Terry Burt described the numbers as a "strong set of results" on the back of contracts wins with existing and new customers generated in part by the O2 Unify joint venture.

McAfee deal

He also pointed to the recent extension of 2e2's managed services deal with McAfee, in which it developed a cloud-based security portal which is designed to administer and secure mobile internet devices within organisations.

But the customer landscape remained uncertain, 2e2's boss revealed. "Against a backdrop of challenging trading conditions, we saw some buying decisions delayed or deferred as the year progressed."

Burt said the outsourcing argument with Patni was driving "efficiencies and cost savings".

"Many of our contracts, particularly the larger ones, now involve a blend of onshore, offshore and near-shore delivery," he said.

2e2 is in the process of consolidating London premises into a single office in Victoria and this should help to reduce costs, something that would be welcome to the firm, given the high levels of debt it is carrying.

The firm has five loans worth £154.3m in total, with Loan A for £25.2m repayable in instalments which finish in June 2015.

Loan B and C - each for £37.5m – are due by October 2016 and 2017 respectively, and the integrator has a revolving credit facility of £18.4m repayable in a single hit by the end of September next year.

A mezzanine facility for £35m is due in a single repayment by October 2018, and carries a rate of LIBOR (the London Interbank Offered Rate) plus 16 per cent – though 11 per cent of the interest rolls up to the deadline.

This is why a number of bods in the channel's magic credit circle reckon 2e2 will ultimately need to be sold, split up, or at the very least will be forced to restructure its debts.

Talk arose last year that C&W WW was sniffing around 2e2 but the exit of the telco's CEO amid financial issues of its own put a bullet in any hope of a deal. ®

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