A bidding war in the Australian telecommunications sector has finally emerged after weeks of moaning and groaning from dissident shareholders in iiNet (IIN) who have been complaining about what they claim to be an underpriced offer from bigger telco and internet provider, TPG Telecom (TPM).
M2 Group’s (MTU) scrip and cash bid for iiNet, announced yesterday, values the target at more than $1.5 billion, against the $1.4 billion cash offer put forward in March by TPG.
M2’s offer values each iiNet share at around $11.37, made up of 0.803 M2 shares for each iiNet share (or $A9.25 based on April 24 closing prices), $A0.75 cash in the form of a special dividend, and $1.37 for the value of estimated synergies (AKA hot air).
TPG’s offered $8.60 a share for iiNet, plus the interim and special dividends that will come due.
So what was the market’s judgement yesterday?
Well, iiNet shares jumped more than 17% to a day’s high of $10.16 as hedge funds and day traders hopped into the takeover battle (at last).
But iiNet shares drifted lower over the rest of the day to close on $9.80, up 13.1%.
Investors are belatedly focusing on the stretched financing of the M2 Group offer.
M2 Group shares retreated 5.3% at $10.90 as investors concluded that it will be strained by the financing of the offer, coming so soon after a big debt funded deal in New Zealand.
TPG shares ended the day down 6.1% at $9.01 as investors concluded it will have to lift its cash bid to win over iiNet.
MTU vs IIN vs TPM YTD – TPG and M2 battle for iiNet
But nothing is certain – TPG owns 6.25% of iiNet and could easily boost that to 10% and block MTU.
If the M2 offer succeeds, iiNet shareholders would own around 42% of the new group under yesterday’s proposal.
M2 has valued its proposal at $11.37 for each iiNet share, which would value the Perth-based provider at $1.85 billion, but that includes the so-called synergies of $1.37 a share (hot air).
Combining just the share and dividend offer would value the offer at about $1.5 to $1.6 billion.
M2 Group’s part scrip proposal could offer a number of benefits to iiNet shareholders, including the possibility of deferring capital gains tax. (The TPG cash offer wouldn’t).
As an inducement, M2 Group has also extended an offer for two iiNet directors to join the M2 board as non-executive directors.
iiNet’s board is now in the process of completing due diligence on M2, and if the bid is considered superior, TPG would have a right the match the offer.
“If the iiNet board determines that any counterproposal from TPG would be more favourable, or at least no less favourable to iiNet and its shareholders than the competing proposal from M2, then the iiNet board will recommend the revised TPG counterproposal, subject to no superior proposal emerging,” iiNet’s statement said yesterday.
"Otherwise iiNet would expect to recommend the M2 proposal, subject to the independent expert finding the offer to be in the best interests of iiNet shareholders and subject to no superior offer emerging."
