Has Vocus Communications Limited got its eye on another acquisition?

Vocus Communications Limited (ASX: VOC) has reportedly turned its attention to NextGen, an Australian national fibre network owner, which is owned by Ontario Teachers’ Pension Plan (OTPP),

NextGen runs a network between Australian cities and Vocus uses NextGen’s infrastructure according to the Australian Financial Review (AFR). Buying NextGen makes sense – but is unlikely to be a cheap buy.

NextGen also owns a number of data centres in a number of capital cities through MetroNode – Australia’s fourth-largest data centre business – with the company’s complete infrastructure map below.

Nextgen network map

Source: NextGen

When OTPP bought its 70% stake in NextGen in June 2013, the AFR says the deal valued the whole of NextGen at around $885 million. Construction company CIMIC Group Ltd (ASX: CIM) owns the remaining 30%, and is likely to demand a high price for its share, but has also been disposing of its assets, or acquiring the remaining portion of companies it didn’t already own – like Sedgman Limited.

The combined Vocus-NextGen group would also allow Vocus to compete on the same level as TPG Telecom Ltd (ASX: TPM) – which owns its own inter-city fibre network. The AFR reports that NextGen has been struggling, losing many of its larger customers to TPG.

There are two main issues to getting the deal over the line.

Firstly, The Australian Competition and Consumer Commission (ACCC) did state last year after a raft of telecommunications mergers that it would look dimly on any further consolidation in the sector. That included Vocus merging with Amcom and M2 Group, and TPG Telecom taking over iiNet.

Secondly, Vocus would likely need to raise some funds from shareholders (again) to make the likely $1 billion plus acquisition of NextGen. That may not be a problem, but you never know.

Foolish takeaway

Vocus also owns around 10% of Macquarie Telecom Group Ltd (ASX: MAQ) – which is worth around $25 million presently, and it would be a much smaller bite for Vocus to takeover. The only problem is that it wouldn’t elevate Vocus to the same level as some of its competitors such as TPG Telecom.

Don’t rule out a bid by Vocus for NextGen. It seems highly likely.

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

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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