Telco merger mania lifts a gear

This week’s new round of bidding for iiNet is all about a telco land grab before the NBN becomes a reality. Here’s how it works for investors.

Summary: Local broadband companies will continue to engage in a land grab for customers as the NBN is built. TPG has made a fresh takeover bid for rival iiNet, trumping a previous offer from M2 Group. But there’s a better than even chance M2 will counter the bid again. TPG has also increased its stake in Amcom Telecommunications, which was set to merge with Vocus Communications, as a plan B.

Key take-out: If M2 wins the battle for IIN, TPG will want to acquire as many smaller telcos as possible before the NBN is complete. Alternative targets like AMM are unlikely to stay independent for long.

Key beneficiaries: General investors. Category: Mergers and acquisitions.

In five years’ time the National Broadband Network (NBN), promised by Labor and in the process of being delivered by the Coalition, should be complete. Access to fixed line internet access across Australia will be controlled by a government-owned entity reminiscent of the pre-privatisation Telstra (née Telecom). Between now and then, local broadband companies will engage in a land grab for customers that will see a smaller number of larger telecommunications providers dominate our market.

Among those players TPG’s (ASX code TPM) executive chairman David Teoh is determined his business will be second only to market giant Telstra. Today (May 6) he revealed that ambition once again, making a fresh bid for iiNet (ASX code IIN).

The current state of play for IIN

Almost two months ago, TPG made an initial $8.60 per share cash bid for rival iiNet. If successful, this merger would have moved the merged TPG/IIN business into second place behind Telstra (ASX code TLS) for fixed line broadband customers.

Although IIN’s board quickly recommended TPG’s deal to shareholders, a week ago rival telco M2 Group (ASX code MTU) countered with a superior all-scrip offer of around $10.00 per IIN share (depending on the price of MTU shares). IIN has a strategically valuable customer base clearly desired by both TPG and MTU.

But TPG had not yet played its best cards.

As a result, Teoh-led TPG has countered MTU’s proposal with a new offer worth $9.55 per IIN share. This bid has quickly been recommended by IIN’s board. The latest bid includes the following important terms:

1. The capital component of TPG’s new proposal is $8.80 per IIN share. Significantly, this can be taken in the form of cash, TPG shares or a combination of the two. Unlike an all cash bid, acceptance of a bidder’s scrip (or shares) does not trigger an immediate capital gains tax liability.

2. In addition, IIN shareholders will receive a $0.75 per share special dividend that will be fully franked. Should IIN be unable to pay this amount, TPG will make up the difference in cash.

3. Curiously, TPG has also imposed a limit on the volume of its scrip it is willing to use in this offer… 27.5 million shares to be precise.

So the ball for IIN is now back in MTU’s court. If IIN were a house for sale the auctioneer would now declare it “on the market”, as the bidder that stumps up the most attractive offer will definitely win the day. TPG’s revised proposal represents a great outcome for IIN shareholders – but there’s a better than even chance MTU will counter once more. And it’s always possible new bidders, such as Optus (ASX code SGT) might yet enter the fray.

Other targets for TPG

A smaller telco merger hitherto expected to proceed without drama was the all scrip offer by Vocus Communications (ASX code VOC) for Perth-based Amcom Telecommunications (ASX code AMM). This deal was to be voted on today (Wednesday May 6) by AMM shareholders, but the vote has now been delayed a fortnight because of TPG.

Unfortunately for the VOC/AMM tie up, TPG has recently increased its 6.7 per cent AMM stake to almost 17 per cent following an on-market raid late last week. TPG has declared it will vote against the merger, and if it purchases further shares in AMM on-market (which it’s entitled to do up to 19.9 per cent) then VOC will be left standing at the altar. AMM’s board will now spend the next two weeks rallying support for the VOC merger from the remaining independent shareholders.

So just what is TPG’s David Teoh up to here?

I see this as a classic case of having “Plan B” in your back pocket if “Plan A” goes awry.

The main target in all this corporate manoeuvring remains IIN. It’s the largest of the second/third tier broadband providers that’s up for sale. The only other target for an aggressive player attempting to challenge TLS would be Optus, and I doubt Optus’s parent Singapore Telecommunications wants to sell its Australian subsidiary.

So the most likely outcome here is that TPG and MTU continue to compete head-to-head for IIN.

Still, as the 1980s movie “Highlander” made clear, “There can be only one”. Should TPG lose the bidding war for IIN, it will want to ensure that alternative smaller broadband providers can still be purchased. AMM fits this description. Its share price fell 15 per cent when it became clear TPG would do what it could to frustrate the merger with VOC, although it has since rallied back a little.

If MTU wins the battle for IIN, TPG’s David Teoh will not sit forever on his 16.7 per cent stake in AMM. Ahead of the NBN’s completion in 2020 he will want to acquire as many smaller telcos as possible.

IIN shareholders have already done well from the broadband customer land grab now taking place. Alternative targets like AMM are also unlikely to remain independent for long.


Tom Elliott is a director of Beulah Capital and MM&E Capital. 

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