The Australian Financial Review is reporting that fibre-optic internet and home broadband business Vocus Group Ltd (ASX: VOC) could be a potential takeover target for a couple of private equity suitors.
According to the media reports there are "at least two" private equity groups running the ruler over Vocus after its shares plunged in value over the course of the past year.
If the telco hits its full year earnings guidance it would be trading on around 10x FY 2017's estimated earnings with a yield likely to come in at a minimum of 3.5% plus the tax effective benefits of franking credits.
The group's market cap is now just over $2 billion, which seems wildly undervalued for a business that now represents the Amcom, Vocus, Nextgen and large M2 Group of businesses, combined with more potential earnings growth from its Australia Singapore and North West Cable internet services projects.
It has been reported that much of the market's apprehension on Vocus is over the "integration" of the businesses, staff departures, and coming disruption from the NBN network. These are undoubtedly issues, but not unresolvable and unlikely to have much of an impact on the group's underlying performance.
It's also true that the M2 part of the business and retail internet services it provides primarily under the Dodo brand is probably of lower quality than the dark-fibre side of the Amcom, Nextgen and Vocus businesses, but the giant share price falls are hard to reconcile with a strong medium-term outlook for the combined businesses.
Others in the telco space including Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) look more vulnerable to margin pressure from the arrival of the NBN, while Vocus also has minimal exposure to the potential for a coming price war in the mobile sector after TPG's move into the space.
I'm not surprised Vocus's share price falls are sparking the interest of private equity given at $3.40 this looks the most scarily cheap, high-quality company, I've ever seen trade on the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO).
If I did not have any exposure to Vocus already I would (like private equity suitors) be considering backing up the truck for shares at today's knock-down valuation.