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M2 Telecoms: Buys Dodo and Eftel

Eleven months after announcing a takeover of Primus Telecom Holdings, M2 Telecommunications (ASX: MTU) has announced an acquisition of internet service provider (ISP) and electricity retailer Dodo Australia, and a takeover offer for Eftel Limited (ASX: EFT).

M2 spent $192 million acquiring Primus, which gave the company 165,000 customers, data centres and metropolitan fibre networks. Dodo will cost the company $204 million, while Eftel will cost the company $44 million (including $5.6 million of net debt).

M2 estimates the acquisitions will see the group generate $1 billion in revenues, add $50 million in earnings before interest, tax, depreciation and amortisation (EBITDA), and result in earnings per share growing by around 20% in the 2014 financial year. The acquisition of Dodo and takeover of Eftel will be funded by debt and approximately 19.2 million new shares issued to Dodo and Eftel shareholders.

This looks to be a good move by M2, adding scale to its business, additional infrastructure as well as more customers. It may also give M2 a means of entering the electricity retail market, through Dodo’s power and gas business, and cross-selling its energy products to existing internet customers. Eftel offers similar products as M2, to retail, wholesale, corporate and government sectors, so should be a neat slot-in business.

M2 will join the likes of TPG Telecom (ASX: TPM) and iiNet Limited (ASX: IIN) as second tier providers of internet services to Australian customers behind the big two, Optus and Telstra Corporation (ASX: TLS).

Interestingly, it seems Eftel shares climbed 43% on Thursday last week, two business days before the announcement was made, with daily volumes spiking. Given 88% of all Eftel shares are collectively owned by Eftel and Dodo directors and their associated entities, it appears someone may have had prior news of the takeover. After the ASX queried the price rise, Eftel said it was possible ‘rumours’ could be the reason for the price and volume spike.

Foolish takeaway

Shareholders will likely be pleased with the acquisitions of Dodo and Eftel, as they should increase earnings, although will need to be mindful of the debt levels M2 is taking on to fund them, and the dilution of their holdings, with the issue of new shares.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in M2 Telecoms.

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