The controversial rollout of Australia's National Broadband Network (NBN) has triggered a wave of takeover activity in the over-supplied telecom market.
In the latest deal, announced at the weekend, fiber and data center specialist Vocus will merge with diversified telco player M2 Telecommunications Group Ltd. to form a new A$3 billion ($2.1 billion) service provider straddling the markets of Australia and New Zealand.
The enlarged entity will be Australia's fourth-largest and New Zealand's third-largest telco.
Under the all-stock deal, M2 shareholders will receive 1.625 Vocus shares for each M2 share they own, representing what is effectively a 25% premium to M2's closing share price on Friday, according to Bloomberg. The board of M2 has unanimously backed the offer, which will leave M2 shareholders with 56% and Vocus with 44% of the new group.
Both companies have been participants or near-participants in the recent merger wave involving mid-sized telcos.
Vocus beat rival iiNet Ltd. to a A$1.2 billion ($840 million) takeover of Amcom Telecommunications Ltd. in July and last year made a string of data center acquisitions. In April, it took a 14.5% strategic stake in enterprise provider Macquarie Telecom Pty Ltd. .
M2, in turn, had been a suitor for iiNet but lost out to TPG Telecom , which won approval last month for the A$1.6 billion ($1.12 billion) acquisition that has created the country's second-biggest broadband ISP.
Yet while the merger looks likely to succeed, Vocus' shareholders may take some convincing. The stock slid 7.24% Monday as investors reacted to the acquisition, apparently concerned that Vocus is still digesting the Amcom deal and about the dilution caused by the all-scrip deal. By contrast, M2 closed up 13.4%.
One main driver behind the merger wave is over-supply. "It's a market where there are too many companies, and not enough customers," said Chris Conway, the head of research and trading at Australian Stock Report, as quoted by the The Australian newspaper.
But it also looks to have been triggered by government efforts to create high-speed broadband networks in both Australia and New Zealand. Vocus says a merger would result in A$40 million ($28 million) in cost savings in two years and produce a stronger competitor to Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and TPG. (See Australia's NBN Cost Blowout.)
The companies certainly appear to be a good fit. Vocus owns metro fiber networks in Australian cities and inter-city fiber routes in New Zealand, along with 15 data centers and offshore connectivity to Asia and the US. Its main products, fiber and Ethernet connectivity, account for 43% of revenues.
M2 is the parent company of a number of telecom brands, including broadband provider iPrimus and value provider Dodo in Australia, and ISP Orcon and fixed-line telco Flip in New Zealand.
Together the two businesses reckon they will generate an estimated A$1.8 billion ($1.26 billion) in revenues and A$370 million ($259 million) in EBITDA over 2015/16.
M2 CEO Geoff Horth is to become CEO of the new-look business, while Vocus chairman David Spence will occupy that post in the merged entity. Four directors from each company will make up the board.
The deal is expected to be finalized in early 2016. It will require the approval of competition regulator Australian Competition and Consumer Commission (ACCC) , but chairperson Rod Sims has indicated it has a strong chance of succeeding because it does not involve any of the broadband market leaders and is unlikely to have an impact on the level of competition.
— Robert Clark, contributing editor, special to Light Reading