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Vocus Communications Limited could rocket on $807 million Nextgen Networks deal

Internet and data centre services business Vocus Communications Limited (ASX: VOC) is to expand its fibre-optic network across Australia with the acquisition of Nextgen Networks for an upfront cost of $807 million. The acquisition fee also includes two other digital infrastructure development projects the North West Cable System and Australia Singapore Cable.

To fund the deal the group will conduct a 1-for-8.9 renounceable entitlement offer with retail shareholders offered $452 million of new scrip and institutions offered a $200 million share placement. The offer price is $7.55 per new share, which is an 11% discount to the ex-rights price of $8.52 that the shares closed at on June 28. Shareholders on the register as of July 4 are eligible to participate in the capital raising.

The deal is also subject to approval from the ACCC, although I expect it will be approved as Vocus’ old enemy TPG Telecom Ltd (ASX: TPM) is one of only a handful of operators of inter-city fibre networks currently and this may ipso facto be a positive in gaining clearance.

The proposed deal looks good as it is expected to be high-single digit earnings per share accretive in FY2017 and is priced at 10.7x FY2016 EV/EBITDA on a normalised cash earnings basis, before synergies and cost savings, which are expected to be substantial to the Vocus Group.

The inter-city internet cable networks are attractive assets to own as they can be thought of as underground toll roads that require little ongoing capital investment, with excellent operating leverage as revenues can soar while the costs to operate them remain relatively fixed.

Vocus already owns substantial amounts of metropolitan fibre-optic networks connecting business premises around Australia’s major cities and the addition of another 17,000km worth across the country via the NextGen acquisition looks a perfect fit to expand its national fibre infrastructure.

Vocus also recently merged with retail and business broadband telecommunications provider M2 Group, which means it has opportunities to cross-sell products and services across the combined group using its own digital infrastructure networks.

The combined group is making steady progress as a new force capable of challenging the likes of TPG and Telstra Communications Ltd (ASX: TLS) and the acquisition of more tech infrastructure should allow investors to benefit from the rapid growth of the digital economy. This business remains a buy in my opinion.

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Motley Fool contributor Tom Richardson owns shares of Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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