Yesterday's financial news was dominated by headlines surrounding the latest bid for internet services provider iiNet Limited (ASX: IIN), which was confirmed by M2 Group Ltd (ASX: MTU) shortly after the market opened.
Although M2's bid was not initially intended for public release, it confirmed speculation after The Australian Financial Review reported that an all-scrip offer had been made, valuing the business at more than $1.5 billion. Here are ten things you need to know from M2 Group's official announcement:
- Should the deal be approved, iiNet shareholders would receive 0.803 M2 Group shares per iiNet share held, while they would also receive a 75 cent special dividend, franked to the maximum extent possible. This means that if M2 Group's shares lose value (as they did yesterday), the deal becomes less appealing for iiNet shareholders.
- M2 Group values its Competing Proposal at approximately $11.37 per iiNet share (based on M2 Group's closing price of $11.52 on Friday, 24 April 2015). This would value the company at over $1.8 billion
- It is important to realise that the $11.37 figure provided by M2 Group also includes a $1.37 per share "value of estimated synergies that would accrue to iiNet shareholders". That is, iiNet shareholders will not physically receive that additional $1.37 but would theoretically receive it over time through the benefits of the merger. That gives iiNet a valuation closer to $1.6 billion based on M2's offer.
- iiNet's shareholders would own approximately 42% of the new M2 Group, meaning they would also benefit from 42% of the synergy benefits realised.
- Now is the ideal time for M2 Group to make a scrip offer (where shares are offered in the place of cash), given that its shares have risen 108% over the past 12 months. On Friday, they were trading roughly 2% below an all-time high of $11.79.
- Although M2 Group's offer gives iiNet a superior value to the $1.4 billion offer made by TPG Telecom Ltd (ASX: TPM) last month, iiNet's board will need to determine the proper value of M2 Group's shares to establish whether it would actually be a better deal than the all-cash offer made by TPG Telecom.
- The offer made by M2 Group may have started a bidding war for iiNet's shares (that's great news for iiNet's shareholders)! It seems as though the market expects TPG will follow up with a counter-offer, which could explain the stock's 6.2% fall on Monday.
- To sweeten the deal, M2 has said that two of iiNet's directors could join its board as non-executive directors. This would improve the chances of iiNet's superior quality services being maintained. M2 said that it "fully recognises the value of different brand strategies and intends to leverage the strength of the iiNet brand and its customer ethos."
- Should the deal be approved, M2 Group would have approximately 1.5 million broadband subscribers (up from roughly 0.5 million today) which would make it Australia's second-biggest fixed-line telecommunications company after Telstra Corporation Ltd (ASX: TLS).
- If iiNet's board establishes that M2 Group's offer is superior to TPG's, TPG Telecom will have the right to match the offer.
With all this merger and acquisition activity going on, investors might feel compelled to jump into the telecommunications sector to recognise some quick profits. However, as we saw happen to TPG Telecom and M2 Group yesterday, high quality stocks can also fall in price after big announcements are made.
If a bidding war does erupt between the different telcos, you can expect to see some great buying opportunities that are well worth waiting for.
