Vocus Communications (ASX:VOC) and M2 Group (ASX:MTU) have entered into a Merger Implementation Agreement that will create Australia’s fourth largest telco valued at $3bn.
Under the scheme each MTU shareholder will receive 1.625 VOC shares. Based on VOC’s last closing price of $6.49, the scheme values MTU at $10.54 per share which is a 25% premium to Friday’s closing price $8.42.
Both companies predict that after the merger the combined market capitalisation will be over $3bn with revenue of $1.8bn. MTU and VOC target cost savings of $40m per annum which will be fully realised by the end of FY18. Both boards unanimously support the merger and recommend M2 Group’s shareholders to approve the proposal.
M2 Group is Australia’s fourth largest broadband provider and owns brands such as Dodo and iPrimus. At the end of April M2 tried to acquire iiNet by launching a competing proposal, however TPG Telecom won the bidding war in a $1.6bn deal. During FY15 M2 Group achieved revenues of $1.1bn and NPAT of $100m. The company predicted revenue growth of ~25% for FY16, as a result of its aggressive expansion and acquisition strategy.
Vocus Communications managed to increase FY15 revenue by 62% to $150m to achieve a net profit of $18.1m in a record year. Vocus owns more than 700km of fibre networks in Australia and 4,200 km in New Zealand focusing mainly on enterprise business solutions. Vocus offers data centre, dark fibre and international internet connectivity across Australia, NZ, Singapore and the US.
The board will potentially face some headwind given M2’s sharp share price decline of the past few weeks. In April 2015 MTU was trading at $11.55 before falling nearly 30% to the current levels. Therefore under the conditions of the proposed merger M2 Group is valued lower than the market valued the company just five months ago.
The deal will be subject to shareholder, court and regulatory approval. The ACCC said earlier this year that any further M&A activity in the telco sector is unlikely after approving TPG’s and iiNet’s merger. However as M2 Group focuses on consumers and Vocus predominantly on the corporate broadband market, the deal should technically be approved.
Author: Simon Herrmann
Sep 28, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.