The Motley Fool

Why the AGL share price took a hit this morning

The AGL Energy Limited (ASX: AGL) share price took a hit this morning after revealing that it had contemplated lobbing a takeover bid for Vocus Group Ltd (ASX: VOC).

The AGL share price fell 1.2% to $20.43 when the S&P/ASX 200 (INDEXASX: XJO) index dipped 0.2% and the Vocus share price surrendered 0.7% to $4.57 this morning.

The energy utility said it recently contacted Vocus with a confidential, non-binding indicative offer the telecommunications services group and was seeking to undertake due diligence on Vocus.

However, it has now withdrawn the offer after its efforts were thwarted by Swedish private equity firm EQT, which made a $3.3 billion (or $5.25 a share) bid for Vocus.

Will a competing bid emerge for Vocus?

This is an interesting development that opens two questions for investors. The first is whether AGL is truly out of the picture or will it (or another party) try to spoil the EQT party.

It appears that the price EQT is willing to pay is in excess of what AGL was willing to cough up, although I won’t be surprised if AGL comes back into frame, as stranger things have happened.

The thing is, there aren’t many targets like Vocus on the market and the bid could bring other potential suitors out of the woodwork, even though that doesn’t seem like a very likely probability.

But embattled Vocus shareholders won’t be complaining, as this ugly duckling has been a serial disappointment since management lost its way following the disastrous merger with M2 Telecommunications.

What the bid uncovers about AGL’s strategy

The second interesting thing that the merger and acquisition saga has uncovered is the lengths AGL will go for growth.

The acquisition-ready company, which owns power plants and sells electricity and gas to households, has been under pressure from politicians who are eager to win votes by targeting rising power prices.

The lack of a coherent national energy policy is also causing angst and it’s not only AGL that’s feeling the heat. Origin Energy Ltd (ASX: ORG) finds itself in the same boat, although unlike AGL, it is exposed to LNG.

AGL doesn’t have the benefit of such diversification and its bid for Vocus underscores this point. However, I don’t think AGL’s and Vocus’ businesses are necessarily an ideal fit even though AGL is probably thinking that it could cross-sell telecom services to its existing customer base, and vice-versa.

But I question if AGL is the “natural owner” of Vocus. This is a concept that suggests a company should only acquire another if it can get an advantage that no one else can by buying the target. This natural ownership isn’t obvious between the two—and now that EQT has shown its hand and is willing to pay a full 30 times net earnings for Vocus, AGL will have to up the ante if it wants to come between the two lovers.

I suspect AGL’s shareholders would baulk at the price for what is primarily Vocus’ customer database.

While we wait to see if a Vocus bidding war is about to unfold, here are four booming shares to buy right now…

Forget boring blue chips: These are the 4 best shares to buy now

Motley Fool Chief Investment Advisor Scott Phillips just released his 4 favourite ASX shares to buy right now. And coming from an investor who’s already helped his members to gains of 254.6%... 330.9%... and even 1,124%...

It’s fair to say that profit signals don’t get any bigger than this! To get all the details, including the names and codes of Scott’s top buys, simply click the link below. Just don’t wait – the sheer biggest gains could be just ahead!

Discover Scott Phillips’ new “best buys now” - CLICK HERE

Motley Fool contributor BrenLau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.