Virtualware

Virtalis is a virtual reality and real-time 3D visualization software business, founded in 2003 and headquartered at Sale in Cheshire. It builds software that turns large engineering datasets such as plant models, ship and aircraft structures into immersive environments that engineers can walk through, review and train in. Its flagship product is Visionary Render. The business was owned by the Alpina Technology Fund I and its co-investment vehicle alongside AMS GB 1. This transaction appears to be a private-equity exit; the founders, Barrie and Andrew Hill, returned to the board in February 2023 and ran the business through a restructuring that produced the current cost base.

What Virtualware has bought looks to be a small, profitable and well-connected business. 19 people in Manchester generate €3.97m of revenue and €1.38m of reported EBITDA, serving a customer list that includes BAE Systems, Lockheed Martin, Thales, Blue Origin, Lam Research, Seaspan, Subsea 7, Vestas and Ford.

The two businesses occupy similar positions in the industry segment. Both sell enterprise software that renders complex industrial data in real time, both are hardware-agnostic, and neither competes on headsets. The key differences are in the customer base.

Virtualware’s key verticals are nuclear and energy through its partnership with GE Vernova Hitachi, public education through the €5.7m vocational-training contract with the Spanish government, rail through ADIF, and healthcare through Osakidetza. Virtalis sits in aerospace and defense, space, semiconductor capital equipment, marine and offshore, and wind. Virtualware has spent two years building toward defense and Virtalis brings BAE, Lockheed and Thales as customers.

The UK now becomes the largest single market at almost 38% of pro forma revenue, and revenue generated outside Spain rises from 54% to 78%. For a company whose stated ambition is 50–60% of revenue from North America, a second English-speaking base with defense references is a more plausible route than Bilbao alone.

The headline in the August announcement was €5m, but that was just the equity component. The 16th October disclosure confirms that the €4.95m cash was equity consideration and that €1.3m of debt stays inside Virtalis, so the enterprise value is €6.25m. There is also an earnout: a percentage of Virtalis’s EBITDA in 2026 and 2027, payable only above undisclosed minimum levels and reduced by €1m of the assumed debt. The percentage, the thresholds, any cap and whether any part is conditional on continued employment have not been disclosed, so we carry an estimated fair value of €0.6m and treat the rest as an open item.

The distinction between reported and adjusted EBITDA matters more here than usual. Virtalis’s €1.38m of reported EBITDA includes €0.51m of development spend capitalised rather than expensed. On the adjusted figure of €0.87m — which is management’s own reconciliation, not ours — the entry multiple is 7.2×, not the 4.5× the reported number implies. That is a fair price for a defence-exposed software asset rather than the bargain the August press release suggested.

Funding for the deal came through a €3.6m five-year amortising facility at EURIBOR plus 1.0–1.5%, with the balance from existing cash. The syndicate is worth noting: alongside BBVA sit the Instituto Vasco de Finanzas, Cofides and Elkargi — two public financing bodies and a mutual guarantee society. Investors should note that the debt is in euros against a sterling-earning asset. The mismatch is unhedged.

The table below shows calendar 2026 as if Virtalis had been owned for the full year. It is not what will be reported — only three months consolidate — but it is the run-rate the market will capitalise.

Two things have changed. Virtualware raised FY26 guidance in its October Equity Story (published 19th Oct) to revenue above €6.3m, from €5.7–6.0m, and we have moved our standalone forecast up to €6.30m from €6.15m. On EBITDA the company guides lower than we had modelled, and we have cut our standalone estimate to €1.30m from €1.37m.

Separately, Virtalis consolidates for three months. Of the €1.14m increase in 2026E group revenue, €0.15m is the guidance upgrade and €0.99m is the acquisition. On EBITDA the two almost cancel: the guidance reset takes €0.07m out, while Virtalis’s €0.35m quarter is offset by €0.34m of transaction costs

Is the deal earnings accretive? - Due to the transaction costs there is 46% dilution in 2026, but from 2027, it is accretive on a like-for-like basis.

The 2027 accretion is 14%. Virtalis contributes €1.38m of reported EBITDA; purchase-price amortization of €0.61m a year and incremental interest of €0.18m a year take back more than half of it before tax. Buy a business on 7.2× adjusted EBITDA, fund it with debt, and write off the intangibles over seven to ten years, and the earnings arithmetic is self explanatory

Is the deal value accretive? - Yes — and by more than the earnings arithmetic suggests, because Virtualware bought revenue more cheaply than its own is valued at.

Our methodology is unchanged: an EV/revenue multiple of 7.0×, drawn from the listed comparators PTC/Vuforia at roughly 7× and Unity Industry at roughly 6×, applied to forward revenue, less a 20% discount for liquidity and micro-cap execution risk.

The acquisition adds €1.0m to 2026E revenue - one quarter of Virtalis, which at 7.0× is worth €6.9m of enterprise value, or €1.22 per share after the discount. Against that, the net financial position swings by €7.3m and a €0.6m contingent consideration liability appears, together worth €1.39 per share. The deal is therefore slightly negative for our target price on a 2026 basis, not because it destroys value but because our target price is anchored on 2026E revenue, which contains only one quarter of Virtalis, while the full cost of acquiring it sits on the balance sheet today.

Applying the same methodology to 2027E consolidated revenue of €11.52m gives a target price of €13.25. We have not rolled the base year, because doing so mid-year would be a methodology change dressed up as an estimate change, and because a 67% increase in target price driven purely by the choice of denominator would not be credible. But by the time of the FY26 results the 2026 base will be historic, and the roll will have to happen. Investors should understand that the mechanical consequence of our published method is a materially higher target price once 2027 becomes the forward year.