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10 things you need to know about the TPG Telecom Ltd & iiNet Limited takeover

Credit: Cebit Australia

The lines were buzzing in Australia’s telecommunications industry on Friday following the announcement that TPG Telecom Ltd (ASX: TPM) would acquire its smaller rival, iiNet Limited (ASX: IIN), for $1.4 billion. The pair skyrocketed 17.7% and 24.8% respectively, while numerous other telcos also jumped on fresh takeover speculation.

Here are 10 important things you need to know about the deal:

The Offer

  1. TPG Telecom’s $8.60 per share offer values iiNet at $1.4 billion (a 33% premium to iiNet’s five-day average share price in the lead up to the announcement). While TPG Telecom already owns 6.25% of the company, it will pay approx. $1.31 billion for the remainder of the shares.
  2. The total cash value will be funded by debt, which is good given how cheap debt is currently.
  3. Prior to the announcement, iiNet’s shares had experienced a sharp fall due to concerns over its slow profit growth in comparison to its sales growth. With the shares down 20% since December, it was a great time for TPG Telecom to make its move.
  4. iiNet’s Board of Directors has unanimously backed the offer with Chairman Michael Smith saying, “The board views this as a significant reward for shareholders who have shown their faith in iiNet.”
  5. While TPG Telecom is confident the deal will progress, it must first receive approval by the Australian Competition and Consumer Commission (ACCC) which has flagged a public enquiry into the proposed takeover.

The New Powerhouse

  1. Once approved, the transaction would give the combined company roughly 1.7 million retail fixed-line internet subscribers. That puts it just behind the industry giant Telstra Corporation Ltd (ASX: TLS), which has roughly 3 million broadband customers, whilst overtaking Optus, owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT), which has just under 1 million.
  2. As quoted by the Fairfax press, IG Markets market strategist Evan Lucas described the pair as “a match made in heaven”, saying that the synergies are “enormous”. Given that TPG Telecom provides a leading value-based offering while iiNet offers more of a premium service, the pair will complement each other perfectly.
  3. Enormous cost reductions will also be recognised. For example, administrative functions and head offices will be merged while listing costs will also be halved.

The Forecasts

  1. According to TPG Telecom, pro-forma combined revenues will be $2.3 billion and EBITDA (earnings before interest, tax, depreciation and amortisation) will be $654 million.
  2. The transaction will be immediately earnings per share (EPS) accretive for TPG shareholders.

TPG Telecom owns a meaningful amount of internet infrastructure throughout Australia and is well positioned to benefit from Australia’s data boom. While the iiNet purchase will deliver enormous synergies and scale benefits, there is a strong case to buy TPG Telecom shares 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.

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