2019-10-22 09:50:071970-01-01 00:00:00

Indicative Proposal

Australian heavy-weight energy provider and retailer, AGL Energy Limited (ASX: AGL), has been granted access to conduct due diligence on the telecommunications provider, Vocus Group Limited (ASX: VOC) in support of a potential acquisition for A$3.1b at A$4.85 per share.

The acquisition faced uncertainty late last month as AGL had announced on 31 May 19 that it was unable to agree with Vocus on the terms of the due diligence to be conducted. However, following Vocus’ announcement last week on 04 Jun 19 that the Swedish private equity group EQT Infrastructure (EQT) had ceased their due diligence and had withdrawn their indicative proposal. Notably, AGL’s offer is 40 cents per share lower than EQT Infrastructure’s offer.

AGL was previously outbid by EQT’s indicative proposal to acquire Vocus at a price of A$5.25 per share in cash. However, as the indicative proposal was withdrawn after an expedited period resulting in EQT’s decision not to proceed, AGL has since emerged as a front runner in the race to acquire Vocus.

AGL this morning announced that the acquisition and convergence of energy and internet capability would optimise the usability for their increasingly connected customers. The acquisition would also strengthen its capability in the integration and management of complex assets and customer portfolios.

AGL’s strategic rationale for the acquisition includes integrating the two companies’ customer service platforms; accelerating the growth of Vocus’ high-quality broadband fibre infrastructure network (Vocus owns 7% of the NBN network). AGL will also utilise Vocus’ platform which provides enterprise, wholesale and government customers with sophisticated data services, to reinvigorate AGL’s large volume customer platform with superior data and energy services. In addition, significant research and development opportunities would be presented into the provision of innovative new products such as smart home technology that integrates energy with the internet. Finally, the usage of Vocus’ data centre business will support and further grow AGL’s wholesale electricity generation portfolio.

AGL has indicated that funding the transaction through a combination of its existing cash as well as its new debt facilities, subject to maintaining its credit rating of Baa2. Currently, AGL’s total debt to equity ratio stands modestly at 36.95% compared to the industries’ highly leveraged standard of 95.03%. AGL stated that the acquisition would likely grow its earnings per share from where it currently stands at A$2.42 within the first twelve months.

The acquisition still requires further discussions between the two companies. After completion of a favourable due diligence report, an agreement in terms from the two companies, a binding agreement is likely to follow. The agreed transaction would also be subject to Vocus shareholder approval.

In light of AGL’s announcements to conduct due diligence on Vocus this morning, shares have soared as high as 11.8% to A$4.28 per share indicating that investors are in support of the A$3.1b acquisition proposal.

AGL’s share price has dropped this morning by as much as 6.4% to A$19.58 per share on the back of the announcement indicating a risk-averse mood amongst those selling off in the AGL shareholder camp. For the buyers, in support of the acquisition, AGL’s low debt to equity ratio, steady book value, and increasing return on equity, buying AGL lower this morning represents a quality investment at a low price.

Another factor likely to influence investor sentiment relevant to the acquisition of Vocus is whether or not the Vodafone and TPG Telecom are allowed to merge. The merger was denied by the Australian Competition and Consumer Commission (ACCC) due to its belief that consumers would be negatively impacted with less competition in the telco space. However, Vodafone and TPG Telecom have challenged the decision at the federal court. If the federal court overturns the decision to prevent the merger, then a joint effort between the two Telcos would likely reduce market share across the telecommunications sector for companies such as Telstra and Vocus. However, if the federal court upholds ACCC’s decision to block the merger, then Vocus’s share price will likely rise as its market share will remain unimpeached.

By Isaac Batterham

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