Vocus Communications announces sixth acquisition in four years
Vocus Communications (ASX: VOC) plans to acquire FX Networks Limited, New Zealand’s only ducted inter-city fibre optic network, for an enterprise value of NZ$116m (A$108m), or around 8 times EBITDA. This will be Vocus Communications’ sixth acquisition, and easily their largest, in the past four years.
At last week’s conference call discussing the proposed acquisition, James Spenceley, CEO of Vocus Communications, made the following points:
- FX Networks comes with a 4,132 kilometre network of ducted inter-city fibre optic cable, so Vocus is paying an enterprise value of A$26 per metre. The replacement value of this network could be at least double this cost, and given the network now passes 98 per cent of New Zealand’s population, the focus will be on making the “asset sweat in terms of return”. That is to say, Vocus Communications is acutely aware of how to best leverage the FX Network asset and will be able to provide the leadership and capital to do this.
- FX Networks is New Zealand’s only ducted inter-city fibre optic network (of three) which means that if and when additional capacity is required, cable could be blown at a cost of $5-$7 per metre. Given the growth in data demand – Cisco is forecasting New Zealand IP traffic to triple over the five years to 2018 – the two competitors (Telecom NZ and Vodafone) would have to dig their cable up to add additional capacity. While there is significant network capacity currently available, Vocus Communications will have a serious cost advantage if and when additional high-speed capacity is required.
- Vocus Communications will have an end-to-end solution across Australia and New-Zealand offering fibre, internet and data centre services. With the greater focus on cross-selling solutions to the combined customer base particularly within the metropolitan areas, double digit EPS accretion is expected in FY16. Near-term synergies include a lower rate of interest on the A$50m of assumed debt, and some savings on any overlap of the combined 156 staff numbers.
A number of stockbrokers are forecasting the revenue line for the much larger Vocus Communications to exceed A$200m in the year to June 2016, and we wonder aloud if the 34 per cent EBITDA/sales margin the company achieved in the December 2013 half-year ($14.7m/$44.3m) will be breached over the medium-term.
There are commitments from holders representing nearly 80 per cent of the shares in FX Networks to accept the Vocus Communications offer, which is expected to be formalised in a matter of weeks.
The Montgomery [Private] Fund owns shares in Vocus Communications Limited.