It's merger mania in the telecommunications sector as corporate wheeling and dealing sent shares in Macquarie Telecom Group Ltd. (ASX: MAQ) soaring to their highest level this year.
The business telecommunications and technology group surged 10% to $5.28 in Friday's trade on news that Vocus Communications Limited (ASX: VOC) paid $15.6 million to take a 14.5% stake in Macquarie Telecom.
The move is surprising given that Vocus is currently pursuing a takeover of Amcom Telecommunications Limited (ASX: AMM).
One has to wonder if the move smells of desperation given that this sector is the most, or is one of the most, active for mergers and acquisitions.
It looks like everyone is in on the game. M2 Group Ltd (ASX: MTU), Telstra Corporation Ltd (ASX: TLS), Singapore Telecommunications Ltd (CHESS) (ASX: SGT) and TPG Telecom Ltd (ASX: TPM) have spent big to chase growth via acquisitions in the past few months.
This is not surprising given that telecom stocks have done well and are rolling in cash but are now facing a more challenging organic growth environment.
These companies need to "buy" earnings growth to continue to justify their share price premiums and I think investors have yet to adjust their risk pricing for the sector to account for this higher risk strategy.
Coming back to Vocus, management said it doesn't plan on launching a takeover of Macquarie Telecom and was treating the deal as a "strategic investment".
I think swallowing the whole of Macquarie Telecom will give Vocus indigestion as it may need to cough up around $130 million to $140 million to buy the rest of Macquarie Telecom (assuming a 25% takeover premium).
Sure, Vocus' shares have strongly outperformed Macquarie Telecom as the chart above shows, but I don't think Vocus' balance sheet can support the acquisition on its own although a combined Amcom/Vocus entity could give management greater access to debt down the track.
One has to wonder if Vcous' move on Macquarie Telecom is to ward off any potential bid for Vocus, which my colleague Owen Raskiewicz highlighted as a possible target.
On the other hand, Vocus could be trying to prevent the potential takeover of Macquarie Telecom and its $15.6 million stake will guarantee Vocus a place at the negotiation table should any bidder emerge – which isn't likely given Vocus' blocking stake.
Regardless, investing fresh capital into the sector has turned decidedly unattractive for investors as premiums are high and so are the acquisition risks.
This is particularly true for the larger players in the industry, although investing successfully at the smaller end will depend on you being able to pick the next takeover target – and that is probably not a good strategy for retail investors.
Fortunately, the experts at Motley Fool have discovered a better investment option. Sign up for free below to see what the stock is.
