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Will iiNet Limited receive a higher takeover offer?

Despite having retreated slightly during morning trade, shares of iiNet Limited (ASX: IIN) are still trading above the $8.705 full cash offer price from rival TPG Telecom Ltd (ASX: TPM), indicating investors are still hopeful of a counter bid.

In an announcement that saw shares of both companies skyrocket on Friday, TPG Telecom said it would acquire all of iiNet’s shares at $8.60 each (valuing the business at $1.4 billion), while iiNet shareholders would also be entitled to its 10.5 cent interim dividend.

While the synergies to be recognised from the takeover are enormous, Credit Suisse believe TPG Telecom would be getting a bargain at that price, even going so far as to slap a $9.67 price tag on the stock in anticipation of a competing offer.

Indeed, there is certainly scope for a counter offer, with M2 Group Ltd (ASX: MTU) and Singapore Telecommunications Ltd (CHESS) (ASX: SGT) – the owner of Optus – being touted as the most likely candidates. An acquisition of iiNet would certainly strengthen their positions in Australia’s telecommunications industry and provide them with similar synergies to those that will otherwise be recognised by TPG Telecom, although both would face constraints in doing so.

To begin with, TPG Telecom already owns 6.25% of iiNet and could easily increase its stake to oppose a higher takeover offer. Meanwhile, M2 Group would also endure higher costs of capital and would unlikely be capable of making an all-cash offer for the business.

Should you buy iiNet?

As it stands, iiNet’s shares are changing hands for $8.74, which is marginally above TPG Telecom’s offer price. Although there is the potential for a counter offer to be made, long-term investors shouldn’t put too much weight behind such speculation. Instead of potentially overpaying for a share in the business, investors could instead look to buy M2 Group or TPG Telecom, both of which could deliver fantastic gains over the coming years.

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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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