On 7 June 2017, Vocus Group Ltd (ASX: VOC) received a non-binding takeover bid from Kohlberg Kravis Roberts & Co (KKR) of $3.50 per share.
Prior to the receipt of this bid, Vocus shares had plunged from a trading high above $9 in August 2016 to a low of $2.33 in May 2017.
The share price is currently trading in the vicinity of $3.55. Longer term holders will be deeply disappointed that the trashed share price seems to be largely supported by an arguably low-ball offer from KKR. The market clearly has difficulty in placing a value on Vocus's diverse Australian and New Zealand-based operations.
Vocus holds extensive fibre optic cable assets and provides cloud and telco services for both wholesale and retail customers.
Vocus's mass market Australian brands include Dodo, iPrimus and Commander. New Zealand operations drive around 17% of revenue and include the CallPlus Group which markets the Orcon and Slingshot brands. The New Zealand portfolio includes energy company Switch Utilities Limited.
As we move towards so called 5G and 6G technologies, appetite for data, speed and bandwidth will increase many fold. Vocus boasts that it now has over 21,000 km of fibre-optic cable laid and operational throughout Australia, 5,000 on-net buildings connected to its network, and a further 20,000 buildings classed as near-net.
A recent agreement between Vocus and Alcatel Submarine Networks (ASN) to construct 4,600km of submarine cable linking Australia, Indonesia and Singapore may be blipping on the radar screens of some deep pocketed entities that have capacity to either invest in Vocus or swallow it whole.
The intuitive value of undersea global fibre optic assets is high. The challenge and high cost of laying competing fibre-optic cables may keep competitors at bay until demand for data and bandwidth thoroughly outstrips the capacity of existing cables.
On the Australian domestic front, the prices that Vocus may levy for the provision of high-speed internet services on its non-NBN fixed line network are regulated by the Australian Competition and Consumer Commission (ACCC).
Prices are also capped by the willingness of consumers to pay for premium fixed line services. While price lids for high speed fixed line services may not be ungenerous, internal company discipline to control network roll-out cost and administrative overheads are required for survival in a competitive telecommunications market.
Vocus's most recent investor briefing highlights cost control as a key risk. The transformation strategy that is proposed to control company costs involves consolidating, strengthening and standardising internal processes and systems. While the proposed strategy may be sound it will inevitably require time, money, expertise and ongoing chief executive commitment to implement.
To help the market get a handle on what the company may be worth, future investor briefings may do well to place additional focus on the practical benefits management sees in the company structure that they are creating.
Notwithstanding bearish market sentiment that is reflected in the recent share price collapse, guidance for FY 17 includes revenue in the order of $1.8 billion, earnings before interest, taxes, depreciation, and amortisation (EBITDA) in the range of $364-$375 million and net profit in the range of $160-$165 million. An annual dividend of 6 cents per share was paid on 21 April 2017.
Foolish Takeaway
Merger and acquisition activity in the sector will likely continue and may present opportunities for medium-term investors who are willing to take a punt on companies such as Vocus.
The outcome of the current takeover attempts surrounding Vocus cannot be predicted, however, formal interest by companies such as KKR suggests significant fundamental value at current share price levels.
