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Here’s why TPG Telecom Ltd will buy iiNet Limited

Telecommunications giant TPG Telecom Ltd (ASX: TPM) flexed its muscles yesterday as it delivered its first-half earnings and showed investors it has the fire power to get the iiNet Limited (ASX: IIN) deal over the line.

TPG’s $1.4 billion bid for iiNet was well received by the market initially, but has since been scrutinised by iiNet’s major shareholders. Many have argued that $1.4 billion (or $8.60 per share) is far too cheap considering the enormous synergies that will be recognised by TPG. Others have also argued that the quality of iiNet’s services could be compromised when bundled with TPG, which could tarnish the business’ reputation moving forward.

Second Grabs

In order to spoil the deal, which has been described by many as a “bargain”, it has been widely speculated that Optus – which is owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT) – or M2 Group Ltd (ASX: MTU) could enter a higher bid.

As it stands, a rival bid appears unlikely. To begin with, TPG already owns a 6.25% stake in iiNet and could easily increase its stake to oppose a higher takeover price. Secondly, M2 Group would unlikely be capable of making an all-cash offer.

Of course, there is no certainty TPG’s deal will go through even if a rival offer is not made. To be approved, 75% of votes will need to be in favour of the proposal and with the list of unhappy iiNet shareholders continuing to grow, rejection is a possibility. On the other hand, rejecting the deal would also see iiNet’s shares plummet – possibly as much as 30%, which might make investors think twice.

In the event that a rival bid is received however, TPG Telecom has shown that it is more than capable of matching any offer made. In its first-half results, which it released yesterday, TPG reported a 59% lift in revenue and an 18% jump in net profit. Operating cash flow was $238 million, while free cash flow was $102.9 million which allowed the telco to repay $30 million in debt.

Should you buy?

Of course, it wouldn’t be ideal for TPG shareholders if their company was forced to pay more for iiNet, but considering the synergies that could be realised from the acquisition, it could still be worth their money. Although the stock mightn’t be cheap at its current price of $9.14, it’s still well worth considering for long-term focused investors.

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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.

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