The Vocus Group Ltd (ASX: VOC) share price fell after the embattled telecom services group released its strategy day presentation this morning after it was rejected by two would be suitors.
This is one of the most anticipated updates on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as management had to sell the upside of staying single to shareholders despite the challenges in the sector.
Reading between the lines, I believe Vocus wants to return to its roots as an infrastructure business and will look at any opportunity to flog its retail division. That wold make a lot of sense and I'll come back to this later.
The Vocus share price tumbled 3.7% in early trade to $3.17 while the Telstra Corporation Ltd (ASX: TLS) share price gained 0.1% to $3.82 and the TPG Telecom Ltd (ASX: TPM) share price dipped 0.3% to $6.54.
Flat is not the new up
Vocus is playing the long game as its message to shareholders is not to expect any earnings growth until sometime after FY20 as growth in its network infrastructure business will be offset by its struggling retail arm.
Management reaffirmed its FY19 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of $350 million to $370 million and said that FY20's EBITDA would come within the same range.
Growth in its network services division of $20 million to $30 million will be cancelled out by a similar sized decline in the retail business, which includes brands like Dodo and Commander.
Needing more than a re-boot
Vocus is undertaking a "strategic reset" (their words, not mine) of the retail division by moving it to a low-cost digital model that will employ a greater automation for sales, customer care and marketing.
Customers just love talking to machines and Vocus is taking a leaf out of the AGL Energy Limited (ASX: AGL) playbook by saying it will try to cross-sell mobile and energy plans to its broadband customers.
This cross-selling opportunity was why AGL wanted to acquire Vocus after EQT Infrastructure withdrew its marriage proposal. I thought AGL's rational was uninspiring back then and I reacted to Vocus' turnaround plan with as much enthusiasm.
This isn't a stock that should be trading on a FY19 consensus price-earnings multiple of around 20 times (before today's fall), which is around a 7% premium to the Telstra share price.
Another corporate transaction in the wings?
What I believe is that Vocus is prepping the retail business for sale now that the world knows the group isn't worth anything close to $4.85 per share that AGL was willing to cough up to seal the deal before it got spooked when it peeked under the covers.
But getting rid of Vocus Retail at a half-decent price may not be easy. If it was, EQT and AGL would have probably gone ahead with the merger.
If I were to hazard a guess, it wasn't Vocus' fibre network division that was the turn off.
It won't be lost on long suffering shareholders that Vocus stared off as an infrastructure play under James Spenceley and merged with M2 Telecommunications, which was really a marketing group.
Talk about making a full circle! Vocus makes a good case study on why most mergers and acquisitions (M&A) are value destroying.
