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A new reason why short sellers are targeting Vocus Group Ltd

Embattled telco Vocus Group Ltd (ASX: VOC) can bend with the best of the limbo dancers with its share price lowering itself to a fresh five-year low of $2.22 during lunch time trade.

Short sellers will be rubbing their hands in glee as the stock is already among the most shorted on the All Ordinaries (Index:^AORD) (ASX:XAO).

Forget its seemingly attractive valuation or yield. This stock is probably heading lower as there are growing concerns it may need to do an emergency capital raising in the not-too-distant future.

It is a very unfortunate time for Vocus to be seen as “cum-cap raise” given where the stock is as companies going cap in hand to the market will typically need to sell stock at a discount to the market price.

Fears that it will need to do a cap raise has intensified recently on reports that Vocus may not be able to sell its New Zealand assets at the price that it wants and it needs the cash to give the company more breathing space under its debt covenants. Buyers smell blood in the water.

UBS thinks the bids for the assets could be as low as around $250 million, which is around half of what the business was initially thought to be worth.

If Vocus is forced to accept a low-ball bid, it probably won’t have enough buffer to keep the group comfortably under its debt covenant and this in turn could cast doubts on its ability to get refinancing by the end of this financial year.

A cap raise in this environment will be a very painful experience for shareholders. Not only is the stock a castaway in the sin-bin, the entire sector is under a cloud as investors have lost their appetite for telcos. You only need to need to look at the miserable share price performance of Vocus’ peers like Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM)!

Vocus management has said it will only sell the New Zealand business at an appropriate price but buyers know they have the upper hand in any negotiation.

However, UBS has calculated that it makes better financial sense for Vocus to raise capital than to sell the assets at around $250 million.

But Vocus’ dilemma is not a binomial outcome. The broker points out that it could seek and receive relief from its lenders to lift its debt covenants.

That could buy Vocus more time but that may be a fruitless endeavour unless the group can turn itself around and return to the path of profit growth.

I would stay away from telcos for now.

But the good news is that there is a sector that looks well positioned for growth, according to the experts at the Motley Fool. They are very bullish on the outlook for this niche group of stocks and have produced a free report on the reasons why investors should be watching this space carefully.

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Motley Fool contributor BrenLau owns shares of TPG Telecom Limited and Vocus Communications Limited (ouch!). 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 Scott Phillips.

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