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Here’s why the Vocus share price is soaring

Vocus Communications Limited (ASX: VOC) has seen its share price jump more than 11% in trading today to $8.20, continuing the gains from Friday.

Last week the company reported revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 181% and 188% respectively, thanks to a combination of acquisitive and organic growth.

The merger with Perth-based Amcom Telecommunications vastly expanded Vocus’ fibre and data centre network. Amcom reported revenues of $170 million and EBITDA of $46.7 million in 2014. In the same financial year, Vocus had $92 million in revenues and underlying EBITDA of $33 million (a combined total of $262 million and $79.7 million in EBITDA).

Amcom was finally acquired on July 8, 2015, and the combined group reported total revenues of $176.3 million and underlying EBITDA of $62 million for the most recent half year. That suggests Vocus has already been able to realise significant savings from synergies by combing with Amcom.

Excluding Amcom, Vocus itself saw revenues rise by 49% and earnings per share rose 39% compared to the first half last financial year. Vocus acquired Amcom by issuing new shares, so the share count jumped significantly.

Vocus now has 1,791km of fibre networks in Australia and around 4,500km in New Zealand. It is now one of the largest data centre operators in Australia, with 22 facilities across 18 sites. By comparison, Nextdc Ltd (ASX: NXT) owns 7 data centres.

But all of that doesn’t take into account the recent merger with M2 Group, which gives Vocus access to retail customers through M2’s iPrimus, Dodo and Commander brands. M2 also had a stellar half year, with revenues up 29% to $707.4 million and EBITDA of $104.7 million.

Clearly, the combined M2/Vocus group is a game changer, significantly changing Australia’s telecommunications landscape. Vocus now has 411,000 fixed voice subscribers, 471,000 broadband subscribers (including 40,000 NBN), 173,000 mobile users and 126,000 energy customers to add to business and wholesale customers on its fibre and data centre infrastructure.

As a combined group, Vocus had $884 million in revenues and $167 million in underlying EBITDA for the six months to December 2015, with earnings per share rising 29% to 15.6 cents.

And like Amcom, Vocus expects to realise cost savings of around $40 million from the integration of M2 by the end of the 2018 financial year.

Foolish takeaway

Vocus also holds a strategic stake of 16% in Macquarie Telecom Group Ltd (ASX: MAQ) – a provider of managed hosting (data centres), cloud services and telecommunications including to the Australian government. Whether Vocus increases its stake remains to be seen, but Macquarie looks like an ideal bolt on acquisition (ACCC permission would be required).

With strong organic growth and industry tailwinds, Vocus is likely to improve on this half year’s results – no wonder buyers have jumped in with both feet when the share price hit $6.99 on February 25.

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Motley Fool writer/analyst Mike King owns shares in Vocus. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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