Embattled telecom Vocus Group Ltd (ASX: VOC) has seen its shares surge 21% to $2.98 over the past 5 days, as speculation mounts that private equity groups are running the ruler over the company.
Fairfax Media reported this morning that infrastructure and private equity funds had been running the ruler over Vocus, figuring what sort of returns the group offers at current prices. With Vocus shares down 68% in the past year, and the company's debt burden at uncomfortably elevated levels, some in the market must be thinking the company looks like easy prey.
However, household investors are likely asking themselves the same question:
"Is Vocus a good opportunity at today's prices, given the risks and prospective rewards?"
It would not be smart to buy shares in anticipation of a takeover bid, because you might be left owning a business that you don't want if no bid eventuates. A successful takeover bid also means that the rewards end up in the hands of the buyer, not shareholders. Fortunately, even at today's prices of $3 Vocus shares appear undervalued.
With the company's long-life cable and pipeline assets, strong brands, and ongoing development projects, Vocus appears to be in a position to maintain and grow its earnings over the medium to long term. Additionally, the company has been growing its market share in the NBN market as consumers switch over, which could lead to Vocus becoming a larger player in time.
While debt remains a concern, Vocus has several levers to pull to reduce debt if necessary, including a possible sale of its data centres and/or curtailing capital expenditure and the dividend. I would buy more shares in Vocus at today's prices, although given the debt burden it is only for investors with a higher appetite for risk. Alternatively, investors could consider owning shares in the other up-and-coming telco, TPG Telecom Ltd (ASX: TPM), led by entrepreneurial CEO David Teoh. TPG is making a major push into mobile at the moment that brings its own risks and rewards.
