The Over the Wire Holdings Ltd (ASX: OTW) share price is frozen on Friday. The pause button has been hit on the telecommunications company following rumours of a possible takeover deal from Aussie Broadband Ltd (ASX: ABB). The speculation has since been confirmed by both companies.
The $300 million Brisbane-based company’s shares are currently frozen at $5.00 apiece. Meanwhile, Aussie Broadband shares are lifting 5.6% on the potential acquisition in the making.
Let’s peel back the layers on what this could mean for the ASX-listed Over the Wire.
An unusual candidate
By the price action on Aussie Broadband shares today, it appears investors are enthusiastic about the potential takeover of Over the Wire. However, reports from The Australian indicate that some analysts don’t see the deal as a ‘no-brainer’.
Although, an argument could be made for the deal from a valuation perspective. Currently, Aussie Broadband trades at approximately 30 times its earnings before interest, tax, depreciation, and amortisation (EBITDA). Meanwhile, based on the Over the Wire share price, the potential takeover target trades at around 10 times EBITDA.
This difference in valuations is likely a byproduct of the companies contrasting growth profiles. While Over the Wire grew its revenue at a respectable 29% in the last 12 months, Aussie Broadband delivered a huge period of growth, increasing 84% year-over-year.
Yet, one analyst believes Over the Wire is not so fitting for Aussie considering the smaller company has a customer-centric focus on IT solutions. Whereas, Aussie deals in the realm of communications reselling — namely, the National Broadband Network.
Instead, the analyst suggests that Spirit Technology Solutions Ltd (ASX: ST1) would be a better fit for the fast-growing network provider. The $184 million company provides internet, cyber-security, and networking solutions to businesses, hospitals, schools, and aged-care providers. It seems investors are taking note, with the Spirit Technology share price up 12% today.
At this stage, the discussions between Aussie Broadband and Over the Wire are preliminary and incomplete. This means no agreement has been entered and no deal may eventuate.
However, the Over the Wire share price has requested to remain halted until a further announcement, or the commencement of trading on 26 October 2021.
Over the Wire share price recap
While the Over the Wire share price has bounced back from its COVID-19 rout, its performance since has been average. Over the past year, the IT company has gained 10.9%, which would typically be considered reasonable. However, the S&P/ASX 200 Index (ASX: XJO) has gained 20% over the same time period.
Likewise, Aussie Broadband has delivered far greater returns during the past 12 months. The new telco competitor has delivered a return of 147% in the past year. This is more than 10 times greater than the performance of the Over the Wire share price.