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Is Vocus Group Ltd ready to divest its Frankenstein image?

Credit: Alon

The bounce in Vocus Group Ltd’s (ASX: VOC) share price on news of the ousting of its chief executive officer (CEO), Geoff Horth, is pretty telling.

But it’s not his departure that should surprise anyone – it’s his ability to hang on this long to the top job that will win him the admiration from even the most harden politicians like National Party fighter Barney Joyce!

The stock is leading the telecom sector higher with Vocus jumping 2.7% to $2.44 as Telstra Corporation Ltd (ASX: TLS) gained 0.7% to $3.50, and TPG Telecom Ltd (ASX: TPG) was virtually flat.

Horth’s exit marks more than just a changing of the guards in my view. It also signals a possible new direction for Vocus, which could see the group streamline and shed assets under a new leader.

Vocus’s chairman has re-commited the group to selling its New Zealand business but I am expecting a far more aggressive divestment program when a new permanent chief executive is installed as the new leader will be inclined to clear the deck.

Horth has been at the helm for nearly seven years – two as the CEO of Vocus and the rest as the CEO of M2 Telecommunications, which merged with Vocus in 2016.

During the period, M2/Vocus was arguably the most acquisitive company in its space with a range of bolt-on acquisitions that created the Frankenstein we see today.

The growth-by-acquisition strategy worked very well in the early days of M2 but the company has subsequently lost its way. I wrote a few times on how M2 had abandoned its “knitting” (symbolism for its core competency) when it jumped into bed with Vocus, but gave management the benefit of the doubt by holding on to my shares – a decision I live to regret.

M2 had been a great marketing platform that could on-sell services it didn’t own. Merging with Vocus meant it had to manage infrastructure too, and today’s decision to “bring forward” Horth’s retirement is proof that he had bitten off more than the combined Vocus could chew.

In my mind, Vocus’ share price had been trading on a “Horth” discount, which should start to unwind as he exits right, although the magnitude of the unwind remains unknown until a permanent replacement is found.

Vocus will need to shed assets and downsize to right the ship if it wants to stay relevant, but in the meantime, like all floundering ships, it is prone to a takeover.

It had received an approach by private equity groups late last year and I am sure today’s developments will only renew corporate interest from suitors who are looking at Frankenstein for its parts.

There’s a lot more work to do to turnaround this ship but Horth’s exit is a step in the right direction.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications Limited (unfortunately!). The Motley Fool Australia owns shares of and has recommended Telstra Limited, 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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