M2 Group
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 29 September 2015, 8:47 AM
- Sectors Covered:
- Telecommunications, Technology
Another day and another takeover in telco land
Subject to shareholder approval, M2 Group (MTU) will merge with Vocus Communications (VOC), in an all scrip merger which values MTU at A$10.55 per share (pre yesterday's announcement). This valuation is based on 1 MTU being worth 1.65 VOC shares. MTU shareholders get Capital Gains Tax rollover relief and will own 56% of the merged group. Counter-intuitively, MTU gets acquired by VOC but we expect this is to prevent TPM blocking.
M2 Group CEO Geoff Horth will become CEO of the combined group while Vocus CEO James Spencely will become an Executive Director. The Board of the combined group would also be a merged entity. VOC closed ~7% lower yesterday (A$6.01) which values MTU at A$9.77.
MTU + VOC = TPG with a strong personalised sales force
On an FY16 pro-forma basis (pre synergies) the combined group would earn A$1.8bn in revenue, A$370m in EBITDA and trade on 10.4x FY16 EV/EBITDA. It would be a full-service vertically integrated telco that has substantial sales capacity.
M2 Group brings consumer mass market appeal with its strong Dodo brand and an even stronger Small to Medium Business sales force through its commission based Commander sales force. Vocus brings strength in enterprise, government and medium sized business sales plus a substantial infrastructure footprint (metro fibre, international capacity/IRUs, NBN access, data centres and voice switching networks).
A strong sales force and the ability to build and sell products aggressively is, in our view, the key upside for the combined group. Importantly, the fixed cost leverage is very strong as incremental capacity requires minimal capex and generates very strong cash flow for the group.
Investment view
In our view the deal makes good strategic and financial sense for both parties. VOC's offer for MTU (pre yesterday's share price weakness) was A$10.55 which is in-line with our A$10.50 valuation. We think there is a very low chance that TPM blocks the deal. The only way they could do this, in our view, is a full takeover offer for VOC. TPM just acquired iiNet so their balance sheet is stretched. Any potential bid for VOC by TPM would require scrip and/or an equity raising. We give this a very low probability.
We make no changes to our forecasts or valuation but set our price target at the implied offer value of A$9.77 and reduce our recommendation from Add to Hold.
More information
Morgans clients can access our detailed research and on M2 Group (MTU). If you are interested in finding out more, please contact your nearest Morgans office.
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