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Vocus Communications announces sixth acquisition in four years

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:

  1. 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.
  2. 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.
  3. 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.

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Chief Executive Officer of Montgomery Investment Management, David Buckland 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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2 Comments

  1. Hi David, it seems like a great deal for Vocus. However I am looking it from another angle, why do you think it was able to beat out other bidders for the asset?

    • Hi Danny,
      Vocus Communications will require acceptance by more than 90% of FX Network shareholders when their takeover offer is formalised.
      I understand 9 FX Network shareholders who collectively own nearly 80 per cent of the shares have signed shareholder lock-up agreements directly with Vocus Communications.
      These lock-up agreements mean those shareholders have pre-agreed to accept the Vocus Communications offer when it is made.

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