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Here’s why iiNet Limited shares are set to skyrocket today

TPG Telecom Ltd (ASX: TPM) has launched an $8.60 per share bid for iiNet Limited (ASX: IIN), valuing the company at $1.4 billion.

In a move that will see the fast-growing telco take full control of its smaller rival, TPG Telecom will pay roughly $1.31 billion for the securities which it does not already own, given that it already owns 6.25% of the company.

According to TPG Telecom, the directors of iiNet have unanimously backed the offer which will see iiNet shareholders receive a cash consideration of $8.60 per share, representing a 31% premium on its 11 March closing price of $6.65 on a cum-dividend basis. Meanwhile, those shareholders on the register at March 16 will also be entitled to receive the fully franked interim dividend of 10.5 cents, essentially valuing the company at $8.705 per share in total.

Strategic Rationale

The value of $8.705 per share is higher than iiNet has ever traded and looks to be a good deal for its shareholders. At the same time however, it may be a reasonable time for TPG Telecom to buy given the concerns surrounding iiNet’s earnings, which have seen the stock sink almost 20% since early December (from $8.48 per share). This means TPG Telecom management may think now is the time to get the best deal.

Given that TPG provides a leading value-based offering while iiNet offers more of a premium, customer service-led product, the pair will complement each other to enhance their national presence. The purchase will also increase TPG’s broadband subscriber base to over 1.7 million customers, while it delivers scale benefits in an NBN environment.

iiNet provides over 1.9 million broadband, telephony and IPTV services to almost one million broadband customers and has over 60,000 NBN and fibre subscribers.

Pleasingly, the acquisition would be immediately earnings per share (EPS) accretive for TPG Telecom shareholders, excluding the effects of amortisation of intangibles upon acquisition. The cash value will also be funded by debt which is reasonable given the low interest rate environment.

Should you buy TPG Telecom?

TPG Telecom is a fast-growing business which is steadily stealing market share from the bigger players such as Telstra Corporation Ltd (ASX: TLS). It owns a meaningful amount of internet infrastructure throughout Australia which will only increase in importance as society becomes more reliant on data (think, the ‘internet of things’). While the iiNet purchase will enhance TPG Telecom’s offering, there is certainly a strong case to buy the stock today.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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.