M2 Telecommunications: Acquires Primus Telecom

The telecomms pac-man takes another bite

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What: M2 Telecommunications Group (ASX: MTU) has announced today that it is acquiring Primus Telecom Holdings for an all-cash price of $192.4m. The company also announced a fully underwritten renounceable entitlement offer to raise approximately $83m, partly to fund the acquisition and is also borrowing $140m.

Shareholders will be eligible to purchase one share for every four shares they hold, at a price of $2.66, a 23.8 per cent discount to the closing price of the company's shares on the ASX on 13th April 2012. The offer will be sent to eligible shareholders on 27th April, with the offer closing on Friday, 11th May 2012.

The acquisition of Primus give M2 approximately 165,000 customer contacts, as well as well-recognised and trusted iPrimus and Primus brands; and the national Primus network, including data centres and metro fibre rings.

On a pro-forma basis, the acquisition would have increased M2's underlying EPS by 8.6 per cent and increased free cash flow per share by 22.8 per cent. M2 expects the acquisition to contribute favourably to earnings in financial year 2013, with the combined business presenting significant opportunities to realise synergy benefits, estimated in excess of $5m per year.

Primus recorded $280m in revenues and $40m in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the 2011 calendar year. M2 has therefore paid less than five times EBITDA for the company, which doesn't appear expensive.

2012 Guidance

M2 also reaffirmed its financial year 2012 guidance, with revenues expected to be between $380m-$420m and Net profit after tax to be between $30m and $34m.

So what: As M2 states in its presentation, it gives the business more scale in the lead up to the NBN rollout and potential buying leverage with suppliers as a larger group. M2 gains three data centres from Primus, and optic fibre rings in five of Australia's major cities (Perth, Adelaide, Brisbane, Melbourne and Sydney).

The acquisition also diversifies the M2 Group further, with the pro-forma business segment contributing approximately 52 per cent of revenues, with residential contributing 32 per cent, wholesale contributing 6 per cent and 2 per cent other.

Now what: All in all, I see this as a good move for M2, gaining additional retail, business and wholesale customers, data centres and optic fibre networks. While net debt will increase from $9.7m to $137.7 post acquisition, M2 has mentioned that it will consider the use of surplus cash to accelerate the repayment of the debt, while aiming to maintain a dividend payout ratio policy of 70 per cent of net profit after tax.

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Motley Fool contributor Mike King owns shares in M2. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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