Are Vocus Group Ltd shares a ‘special situation’?

The Vocus Group Ltd (ASX: VOC) share price has bounced above the level of the takeover offer from private equity firm KKR, meaning investors expect the board to reject its offer.

Vocus Share Price

VOC share price

Source: Google Finance

At its current price of $3.57, the shares currently trade at a premium valuation to the takeover offer put forward by private equity firm KKR earlier this week. The deal priced Vocus at $3.50 per share.

That says to me that shareholders have voted on the offer — it’s not good enough.

Is it a special situation?

To be honest, if Vocus shares were trading at $3.40 per share right now, I would likely buy shares immediately for a potential ‘special situation’ because that would give me some upside to the offer price.

However, it is almost as clear as it can be that Vocus’ board is going to reject the highly speculative and opportunistic takeover offer.

Nonetheless, let’s run through what might happen next.

The way I see it, there are a few ways it can go:

  1. The deal is accepted but falls through because some conditions are not met. There are a number of conditions to KKR’s offer, so this is a real possibility. However, I would rate this as a low probability because I doubt the offer will make it passed board approval.
  2. The deal does not go through because Vocus turns out to be a basket case and KKR walks. I think this is more likely than the first, but it may only be a temporary issue, with downside protection. Vocus’ assets are always going to be worth something.
  3. The deal is rejected and no new offer arises. The share price is likely to drop, but not necessarily as much as some people might think (see below)
  4. Another (higher) offer is made by KKR. This is possible, but I’m not sure how likely it is that a significantly better offer is made if the share price stays high.
  5. Another suitor enters the bidding to start a bidding war. I would say this is less likely than another offer from KKR, but it offers upside.

Ultimately, I think the deal will be rejected and Vocus’ share price, although volatile in the short-term, will be better off for having done so. Importantly, I believe that the news of a takeover alone reinforces what bulls were saying — that Vocus has great assets — and contradicts what many bears were saying — basically, that the business is going nowhere but down.

Foolish Takeaway

I’ll admit that the offer which KKR tabled was rubbish, but you cannot blame them for seeing if they could get away with it.  

The way I’m thinking about the current state of affairs is that Vocus’ board will reject the KKR offer and the company will retain its long term potential. The worst case is they accept the deal then it falls through on conditions — but the downside is likely to be limited.

Ultimately, I think it’s a case of ‘heads I win, tails I don’t lose as much’.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia owns shares of 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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