Shareholders of internet services provider iiNet Limited (ASX: IIN) have some thinking to do after rival internet services provider TPG Telecom Ltd (ASX: TPM) offered $8.60 per share for the business valuing it at $1.4 billion.
iiNet shareholders on the register prior to the ex-dividend date of March 12 will also receive the 10.5 cent interim dividend.
The added benefit
The other factor for shareholders to consider is that iiNet intends to pay a substantial special dividend prior to the offer scheme's implementation given the retained earnings it still has available.
The offer's consideration will be adjusted for the special dividend and iiNet shareholders who can capture the full benefits of the franking credits associated with the special dividend will receive additional value above the $8.60 offer price.
Whether shareholders can benefit or not will depend on their own personal tax circumstances.
iiNet is today selling for $8.90, which is 30 cents above TPG's cash offer price and this reflects the expected cash benefit in franking credits available to (some) shareholders if the special dividend is paid and the scheme's consideration adjusted as expected.
There may also be some expectation of an improved offer from a rival bidder baked into the price, although buying on this basis is not an advisable investing strategy.
Will the deal go ahead?
iiNet has been criticised in the media and by shareholders for not communicating the benefits of the deal as well as it might and only today released an update clarifying some of the details reported above.
Arguments in favour of deal
iiNet's interim results delivered in February were disappointing, with the company delivering flat earnings growth on modest revenue growth as rising costs compressed margins. Not a good look for a junior telco in a competitive space and the other factor is that at the end of 2014 the business carried a net debt of $382.7 million at 1.9x EBITDA .
The flat growth and considerable debt mean that a takeover offer at a 33% premium to the five-day volume weighted average price prior to the 11 March offer date is reasonable given the company's recent performance and softening outlook.
The board should also be better placed than anyone to consider the offer's merits relative to the company's earnings outlook.
Arguments against
The primary argument against accepting the offer is that the premium being paid should be higher if it's a cash only offer.
If TPG is to offer no scrip and effectively exclude iiNet shareholders from the synergy benefits of the deal then they should have been offered a higher premium to accept the deal. iiNet's board evidently come off looking weak, given the failure to negotiate a scrip deal or substantial premium as an alternative.
Other options
The other hope for iiNet shareholders is that a rival bidder makes a play for the business and potentially forces a bidding war. The only likely candidate being Optus' owner and Asian telco giant Singapore Telecommunications Ltd (CHESS) (ASX: SGT).
Optus' market position means it has the most to lose or gain from any potential deal and there appears little chance of any other bidders.
Rival telco M2 Group Ltd (ASX: MTU) already has a lot of debt and several new acquisitions to integrate, while Telstra Corporation Ltd (ASX: TLS) would likely fail to convince the ACCC that a merger would not be anti-competitive.
iiNet shareholders then have to consider whether the $8.60 offer plus the potential franking benefits from a large special dividend are sufficient to persuade them to accept the offer. Personally, I am happy to accept given my belief in iiNet's modest outlook and the opportunity the cash will provide to find stocks with more growth potential.
