Vocus Communications Limited (ASX: VOC) announcement today that it was acquiring Nextgen didn't come as much of a surprise to the market.
Media were reporting the deal as early as two weeks ago, and some investment banks were speculating in March this year that the acquisition made plenty of sense.
Synergies and strength
But it's a big step forward for the telecommunications company as it seeks to compete on an equal footing with rival TPG Telecom Ltd (ASX: TPM). Nextgen provides Vocus with a vital piece of the wheel it was missing – a robust inter-city fibre network.
Previously, Vocus paid Nextgen to use its network. Now the company will save itself around $30 million in synergies thanks to the merger of the two companies.
The combined company will now feature:-
- 17,000 kms of backhaul fibre networks, connecting Australia's capital cities and major regional centres.
- On-net buildings increase to more than 5,000
- Vocus will increase its NBN points of interconnect from 68 to 112 of 121 with a minimal ($11.5 million) capital outlay
- The ability to offer clients an integrated product suite
- The ability to bid for new contracts Vocus had previously been locked out of
- The ability to bundle multiple products and cross-selling opportunities to customers
However, the deal has yet to receive the blessing of the Australian Competition and Consumer Commission (ACCC) – which may yet veto the deal.
Strong trading update
Vocus also gave a trading update today, and says it expects to see between $820 and $835 million in revenues for the 2016 financial year (FY16), and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $213 and $218 million.
In the fourth quarter alone, Vocus says it expects EBITDA to be around $100 million, indicating the strong growth it is generating organically and from recent acquisitions, including M2 Group and Amcom.
Competition
Australia's telecommunications sector is hotly contested and there's no secret why. With demand for data growing at exponential rates as smartphones and subscription video on demand services boom, controlling the network infrastructure is much like owning tollroads.
Yes, there are alternatives – but not that many. And Vocus also gets to sell add-on and complementary products to its customers.
It appears that the sector is headed for a similar situation like the banks or supermarkets sectors, with a number of major players dominating the industry. Add in TPG, Singtel's Optus and Telstra Communications Ltd (ASX: TLS) and the four companies virtually own the Australian fixed telecommunications industry.
That could shrink even further. A natural progression might see Optus and Vocus tie the knot, and TPG and Vodafone extend their partnership – unless TPG bids for Vodafone first. That would leave three companies virtually controlling our internet and mobile networks.
Foolish takeaway
Given the size of Australia, its population (levels and distribution) and demand for telecoms services, it makes sense for smaller companies to merge or join with others to enjoy the benefits of scale, slash costs and pass on the benefits to consumers.
As a Vocus shareholder, I'm quite happy with the announcement.
