All has been quiet on the telecommunications front over the last month or so with no bids being lodged for iiNet Limited (ASX: IIN) since the latest offer from TPG Telecom Ltd (ASX: TPM). But as highlighted by the Fairfax press this morning, there are whispers that M2 Group Ltd (ASX: MTU) could be biding its time before making another offer.
iiNet is one of Australia’s largest telecommunications businesses and is highly regarded for its excellent customer service levels.
The Perth-based business was first approached by TPG Telecom earlier this year in an all-cash deal worth $1.4 billion which would have seen the combined entity become Australia’s second-largest broadband provider, positioning it to threaten Telstra Corporation Ltd’s (ASX: TLS) dominance in the market.
While investors behind both companies welcomed the move initially, iiNet’s shareholders soon became angry that the amount offered for the business was too low considering the synergies that could be recognised by TPG should the transaction proceed.
Much to the delight of iiNet’s investors, M2 Group then lodged a superior bid, valuing the business at roughly $1.5 billion in a mostly scrip-based offer (that is, it would pay the business by issuing shares as opposed to paying cash). TPG then lodged a counterbid, offering an option of either shares or cash which was then recommended by iiNet’s board.
Now that you’re caught up on the situation, there has been very little activity surrounding the merger proposal since TPG lodged its latest offer early last month, but that could change later this week.
Australia’s competition watchdog, the Australian Competition and Consumer Commission (more commonly referred to as the ACCC), is due to make its decision on the pending tie-up on Thursday. Given that there is a chance (although it is seen as unlikely) that the ACCC will reject the deal, there has been no point in M2 Group raising its bid.
Should the ACCC decide to block the TPG/iiNet merger, M2 Group will be left standing with the highest bid and would be considered highly likely to acquire the business. But if the ACCC approves the deal, as it is expected to do, M2 Group will have to decide how much iiNet is really worth to it.
Will there be another bidding war?
As previously highlighted, whichever company succeeds in acquiring iiNet will become Australia’s second largest provider of broadband services, putting the winning party in an excellent position to threaten Telstra’s dominance (provided iiNet can be properly integrated into either business).
At this point, it seems to me as though TPG Telecom will prevail as the acquirer of iiNet. As much as M2 Group will want it, it needs to be sensible with how much it pays for the business to ensure it doesn’t destroy shareholder value, and a higher offer could push the total premium M2 Group pays for iiNet above the expected synergies. As such, the Board will need to determine if iiNet is still within its reach or if the premium charged has become too great.
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