Vocus Group Ltd rumoured to be selling its data centres

The Australian Financial Review is reporting that embattled telco Vocus Group Ltd (ASX: VOC) may sell its data centre business in an effort to raise funds to pay down its gross debt.

According to the newspaper analysts at Macquarie Group Ltd (ASX: MQG) believe Vocus could potentially get around $160 million for its 16 data centre businesses.

The newspaper is reporting the telco is in “preliminary negotiations” to sell the data centres with “sources” telling the AFR that listed data centre business Nextdc Ltd (ASX: NXT) may be a suitor.

The potential decision to sell the data centre business probably makes sense given one of Vocus’s biggest problems is that it now expects net debt to stand at $1 to $1.1 billion as at June 30 2017, which is around 2.8x revised forecasts for full year EBITDA between $365 million to $375 million.

The company’s net leverage cannot exceed 3.5x under the terms of its banking covenants and is expected to stand at around 2.6x as at the end of the financial year. The idea to raise funds to pay down some debt makes sense then and the share price is likely to respond positively to the news if any deal does materialise.

Furthermore the opportunity to simplify the business via asset sales may help its senior management team focus on fixing multiple operating, technology, and finance reporting problems it flagged in yesterday’s analysts’ call.

Prior to yesterday’s giant earnings downgrade around 14% of the stock was short sold by traders on the correct assumption that an earnings downgrade was on the horizon. Given the company’s prior guidance was heavily skewed to the second half the downgrade was no big surprise, but the size of it was and is likely to have especially pleased the short sellers. The stock is unlikely to recover until the company delivers a trading update that delivers on guidance, or announces news over potential asset sales.

Given its founder-led nature and move into the mobile 5G space I would prefer TPG Telecom Ltd (ASX: TPM) as an investment option for anyone looking to go bargain hunting in the telco sector.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited, TPG Telecom Limited, and Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of TPG Telecom Limited and Vocus Communications Limited. 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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