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Looking at: Vocus Communications


Looking at: Vocus Communications

I was reading the Independent Report on the merits of the proposed acquisition of FX Networks by Vocus Communications Ltd (ASX: VOC), and thought I would provide the following points made by KPMG, that haven’t previously been articulated in past posts.

1. FX Networks is currently depreciating its duct and fibre on the basis of a 21 year useful life.  We understand that Vocus assumes a 30-year economic life for depreciating its fibre assets.  The FX Networks depreciation is therefore higher than that which would be derived if applying Vocus’ accounting policies.
2. FX Networks capex was particularly high in FY14 (to 31 March 2014) due to the installation of new Infinera Intelligent Transport Network equipment and East Cape fibre acquisition.  From FY15 onward capital expenditure is expected to be materially lower than depreciation as much of the capital expenditure required to achieve the forecast growth has already been made over the last decade.
3. FX Networks’ management have identified, but not quantified, the following potential synergies of combining the operations of Vocus and FX Networks:
a. Purchase of international capacity and improved return on Vocus’ IRU for Southern Cross capacity;
b. Leverage of trans-Tasman services for FX Networks’ New Zealand based customers requiring Australian data centre services;
c. Domestic (New Zealand) transit for Vocus’ business;
d. Cross sell of Vocus services and products to FX Networks’ customer base;
e. Enhance voice platform for FX Networks’ customers;
f. Enhanced data centre services;
g. Integration of FX Networks’ storage offering;
h. Effective route to market, unique relationships with common customers;
i. Competitive advantage/ scale to computer against larger incumbents; and
j. Diversification and vertical integration.


While Vocus is paying an historical (to March 2014) EV/ EBITDA multiple of 8.6 times, all the items identified above are expected to be value-accretive.

This does not cover important issues like cost synergies, cash management and capital management.

At the time of writing, Vocus Communications had received acceptance in respect to 93 per cent of FX Networks shares.

The Montgomery [Private] Fund owns shares in Vocus Communications.



Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. I’ll admit I’m looking at last years figures as I haven’t had a chance to go through the recent results yet, but it surprises me that this one is in the fund. The quick and current ratios are below 1, which has me worried about their ability to pay their obligations. The negative NTA per share has me worried too – perhaps a non-cash writedown could be coming in the future? The was also a big drop in the return on capital last FY (haven’t got this years figures done yet) from about 10% to about 3.5%, plus that rising net-debt-to-equity.

    Just had a quick browse over this year’s results and I love the amazing growth, but the level of intangibles as a portion of equity (61%) really bothers me. Good to see the NTA per share back in the positive though.

    • Writedowns occur when asset values are over-inflated. NTA can’t tell you that. If however ROE is very low, it generally means that either the numerator (the profit) is very low, or the denominator (The Equity) is too high. So writedowns tend to occur when ROE has been low for a long time.

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