Communications mashup Vocus Group Ltd (ASX: VOC) is on the radar of investors at the moment because of an opportunistic $3.50 per share private equity offer by KKR (even if the offer is rubbish).
I thought it would be interesting to take a look at how Vocus Group makes its money.
It turns out it's not that simple.
Unlike ever steady Telstra Corporation Ltd (ASX: TLS) the Vocus Group we see today is a completely different beast from the fibre and data company you might remember from a couple of years ago. The acquisition of Amcom and merger with M2 has left the company more like a loosely joined conglomerate and the group's revenue profile has been completely transformed.
The group's 2016 full year revenue only included a four-month contribution from the M2 business, so for the most relevant picture we need to wait until the 2017 full year results come out in August.
In the meantime we can get a feel for the make-up of revenue using the company's first half results for the 2017 financial year (1H17). Here is how Vocus Group splits its revenue by segment:
Mass Market Australia (59%)
The Mass Market (Australia) segment is mostly made up of income from internet subscribers and from bundling internet with other products like power and gas.
It includes the Dodo and iPrimus internet service providers and will be a big focus for Vocus in the next few years as the roll out of NBN brings the chance to capture customers off competitors.
The segment has an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) margin of around 26%.
Corporate & Wholesale Australia (23%)
If you remember Vocus for the fibre and data infrastructure company of a couple of years back, the Corporate & Wholesale division is where you'll find comfort. The segment includes Fibre & Ethernet, Internet, Voice and data centre revenues. Although the segment is smaller on a revenue basis the value is huge, contributing a boggling 50% EBITDA margin.
New Zealand (18%)
The New Zealand operations can be split into 'Corporate/Wholesale' and 'Mass Market' (retail consumers). The revenue has mostly come from merger with M2 which added the internet service provider brands in New Zealand.
The segment has a lower EBITDA margin, but at a still respectable 19%.
Foolish takeaway
The revenues of Vocus Group have been completely transformed since the company's rapid phase of vertical integration. I'm skeptical of rapid acquisition programs because I have seen several fail in the past (hello, QBE Insurance Group Ltd (ASX: QBE)).
If the private equity bid for Vocus Group fails, having a good understanding of how the company makes its money should help judge the success or otherwise of the company's recent expansion.
