Could TPG Telecom Ltd’s bid for iiNet Limited be rejected?

A tie-up between TPG Telecom Ltd (ASX:TPM) and iiNet Limited (ASX:IIN) is by no means a certainty.

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Credit: Cebit Australia

The highly-anticipated merger of iiNet Limited (ASX: IIN) and TPG Telecom Ltd (ASX: TPM) could become compromised with one of iiNet’s major shareholders suggesting he may vote against the transaction.

As highlighted by the Fairfax press, Hamish Carlisle of Merlon Capital Partners, which owns roughly 3% of the company, is likely to vote against TPG’s proposal because he believes iiNet is worth more than the $1.56 billion offered by TPG Telecom.

iiNet reported earnings before interest, tax, depreciation and amortisation (EBITDA) of $192 million in 2014 – a figure that is likely to increase for the 2015 financial year and beyond, especially if Telstra Corporation Ltd (ASX: TLS) is forced to slash the wholesale prices for access to its copper network (which some brokers believe could reduce iiNet’s costs by up to $25 million).

That means that TPG Telecom is offering roughly 8x EBITDA for the business, while Mr Carlisle believes iiNet deserves to trade at 9x EBITDA which is in line with some of its peers, as highlighted by Fairfax.

In order to get the deal over the line, 75% of iiNet’s shareholders will need to vote in favour of the proposal. While TPG Telecom will not be allowed to use its shares to participate in the vote (TPG owned 6.25% of iiNet as of March 2015), TPG’s proposal could be rejected if other shareholders begin to feel underwhelmed by the price offered by the telecommunications giant.

Indeed, iiNet’s chairman Michael Smith has warned that a rejection of TPG Telecom’s offer could result in a plummeting share price whereby the stock could fall back to pre-takeover offer levels around $6 or $7, down from $9.41 today. Meanwhile, proxy advisory firms, Ownership Matters and ISS, have also recommended shareholders vote in favour of the transaction.

As it stands, shareholders are being asked to approve a $9.55 per iiNet share total consideration which includes a cash or scrip (share) component of $8.80, in addition to a special fully franked dividend of up to 75 cents. The scheme meeting will be held in Perth on Monday, 27 July 2015, where investors will learn the fate of their company.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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