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Vocus remains in play

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By Paul Rickard

Vocus shareholders will be breathing a sigh of relief that a second private equity firm has joined the bidding war. But many of those same shareholders will be wondering how a company that was trading at $9.40 just a little over a year ago could be the subject of a fire sale now at $3.50 per share.

On Monday, Affinity Equity Partners lobbed an indicative and non-binding proposal to acquire all of the shares in junior telco Vocus at $3.50 per share via a scheme of arrangement, matching an earlier non-binding proposal from Kohlberg Kravis Roberts (KKR). The Vocus Board announced that both parties would be provided access to conduct due diligence, potentially setting up a bidding war.

While the indicative bid of $3.50 is a long way short of $9.40 and less than half the $7.55 paid by shareholders in a $652m entitlement issue last June to fund Vocus’s acquisition of Nextgen, it still represents a premium of 50% to the low point of $2.33 hit seven weeks ago.

Source: CommSec

And as the Board of Fairfax discovered, just because two private equity firms make indicative offers to purchase the company, there is no guarantee that they will come to fruition. TPG and Hellman & Friedman bid $1.20 for Fairfax, only to withdraw after commencing due diligence. Fairfax is now trading around $0.95.

So, what is the future for Vocus? First, a bit of a re-cap on how Vocus got into this position.

Acquisition Indigestion

The collapse in Vocus’s share price can largely be put down to indigestion from too many poorly executed transactions. As a result, the market losing confidence in the management team, and slashing the multiple it was prepared to pay for what on paper appeared to be a high flying growth company.

The catalyst might have been the purchase of Nextgen announced in June last year, but the foundations were the purchase of Amcom in July 15 and the merger with the M2 Group in February 16. Three big deals all within the space of 12 months.

On the share market, investors felt the impacts of these transactions as follows:

  • 23 August 16 - Vocus announces full year profit. At the bottom end of previously announced guidance. Provides update on the integration with Amcom and merger with M2, but details disappoint the market. As investors peer more into the numbers, the share price drops under $8.00 in the days following;
  • 21 September 16 - shock resignation of CFO Rick Correll. Vocus offers no explanation. Shares plunge to $6.09;
  • 29 November 16 - Annual General Meeting. Trading update provided underwhelms market - total revenue for FY17 of $1.9bn, underlying EBITDA of $430m to $450m, underlying NPAT of $205m to $215m, says it expects to report material below the line expense of $105m. Highlights weak first half, acquisition and integration challenges. Shares crash from $5.76 to $4.35;
  • 22 February 17 - first half result. Reconfirms full year guidance, shares rally from $4.40 to $4.81;
  • 2 May 17- trading update. Revenue now guided to be $1.8bn in part due to accounting issues, EBITDA from $365m to $375m, NPAT from $160m to $165m. Below the line items now $113m. Shares plunge from $3.35 to $2.44;
  • 7 June 17 - KKR lodges indicative proposal to buy Vocus at $3.50 per share. The shares rally from $2.86 to $3.48.

Vocus remains committed to its strategy which is to be a vertically integrated, challenger telco providing services across Australia and New Zealand to all key market segments. With a market share of 3.5% of the Australian telecommunications market and 6.7% in New Zealand, it sees significant growth opportunities as it leverages its 30,000km fibre network and infrastructure footprint. This involves Australian mass market consumer brands Dodo and iPrimus, Commander for the SME market, New Zealand mass market and a wholesale division providing focused telecommunication services to Australian corporates. It is also investing in a 4,600km submarine cable linking Australia to Singapore via Indonesia, which is on track for service in mid 2018.   

The Brokers

Each of the eight major brokers that cover the stock has a ‘neutral’ or ‘hold’ rating on the stock. Like the market, the analysts have been very badly caught out by the performance of Vocus - it wasn’t that long ago that the broker consensus target price was over $9.00. Today, it sits (according to FNArena) at $3.29, with UBS the highest at $3.65 and Morgan Stanley the lowest at $2.55.

In regard to forecasts, the brokers have Vocus trading at a multiple of 14.3 times FY17 earnings and 16.2 times FY18 earnings. Notwithstanding the current interest from private equity, a couple of the brokers see Vocus as “high risk” and haven’t ruled out asset sales or a capital raising.

My view

I am not really into junior telco risk and hence Vocus is not on my radar as a buyer.

However, if I owned Vocus and had worn all the pain of a stock trading from above $9.00 down to $2.33 and now back to $3.50, I think I would be inclined to hang on and see if a cash bid from one of the suitors is forthcoming. It is hard to reconcile the huge change in valuation in such a very, very short period of time. It makes me think that there must be some upside.

My guess is that Vocus will prove to be different to Fairfax, and that shareholders will have the opportunity to consider a formal takeover offer at $3.50 or higher. Hold.

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Published: Thursday, July 13, 2017


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