Consolidation in the corporate telecom space
As many readers will know, Vocus Communications Limited (ASX: VOC) has been the potential acquirer of Amcom Telecommunications Limited (ASX: AMM) for quite some time. This has been speculated since Vocus’ October 2014 10 per cent acquisition of the shares outstanding in Amcom. We thought it may be worthwhile to review the timeline of events up to now and consider what this means for the future.
After the initial 10 per cent buy-up in October, Vocus and Amcom entered into exclusive due diligence in November 2014. On the 17th of December, the two parties came to an agreement of a scheme that would see Vocus takeover Amcom for 0.4614 Vocus shares for every Amcom share. Combined the two would be worth approximately $1.2 billion.
The acquisition looked very likely to be completed without a hitch. However on the 30th of April this view abruptly changed as TPG Telecom Limited increased its stake in Amcom from 7 per cent to 18.6 per cent – this was later increased to 19.99 per cent. (TPG expressed its intention to vote against the scheme and the full statement can be found here). With Vocus not being allowed to vote via its own 10 per cent stake, this rendered the likelihood of the acquisition going through as near impossible.
Subsequently, on the 19th of May Vocus sold its 10 per cent stake in hopes that the new shareholders would vote in favour of the scheme (whether they do or not is up for debate).
As it stands Vocus would need to receive affirmative votes from about 60 per cent of the Amcom shareholder base. Given that TPG holds almost 20 per cent of the shares, this equates to a requirement of 75 per cent of the base voting for the scheme. This may be difficult as many of these shareholders only hold small stakes and may not feel it worth their time to vote.
However, Vocus and Amcom have run a strong social media campaign to drum up support (the website for this move can be found here). The vote is currently scheduled to be cast on the 15th of June.
Now we ask, if the scheme goes through, what kind of prospects would we expect from the combined entity?
In their original due diligence, the parties have identified $13-$15 million of synergies and opportunities for cross selling (the latter in dollar terms is likely to be much greater than the former). The establishment of a national player in the corporate telecom space with a competitive suite of products would (in our view) be disruptive to the comfortable oligopoly Telstra and Optus currently operate in. In addition, the expanded product suites allow for more ‘bundling’ which provides clients with lower cost services whilst providing solid incremental margins to the telco.
Telstra and Optus collectively control over 80 per cent of the corporate telecommunications market in Australia. This part of the market appears ripe for competition, similar to what’s been seen in the retail segment of the market over the last decade. With the market value at over $9 billion, the returns on offer to companies with the assets, technology and capacity are staggering.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.
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