Vocus in Focus
Things have taken a turn for the worse for Vocus (ASX: VOC), as takeover talks were terminated after private equity investor EQT pulled out. Vocus shares dropped by more than 17% from $4.60 to $3.77/share on announcement of the bad news. Is Vocus still worth a pick?
Vocus is a multinational telecom firm based in Sydney specialising in the operation of fibre optic networks. Vocus provides retail and wholesale services for its network services, which include internet, dark fibre, IP WAN and cloud services to different-sized businesses. Problems began when the merger with rival M2 Group occurred in 2016. The merger would go on to create a company worth more than $USD 1.4 billion, and consolidate the two rivals into the fourth largest telecom company by market value. Before the deal, it was hoped that the merger could bring together Vocus’ infrastructure as well M2’s corporate customer base to help them take advantage of the National Broadband Network that was being built then. Hard synergies were estimated to be a one off cost reduction of $20M.
Successful mergers and acquisitions can bring about diversification, cost sharing and risk reduction, yet many M&A’s still fail. While both companies performing well before the merger, a clash in management style and teething issues post consolidation would have disastrous consequences for the new combined Vocus. A string of high profile resignations in 2017 and mismanagement caused a massive profit downgrade from $200M to $160M. Conditions only improved after Kevin Russell took over the helm as CEO, yet even he couldn’t prevent a 17% slide in profits in 2018. Vocus shares fell from a record high $9 in 2016 to levels below $3/share after the merger.
Vocus’ substantial fibre infrastructure consisting of metropolitan networks, mobile towers and undersea cables has been the main drawcard for potential investors. Yet potential buyers will be put off by its retail sector, which is facing stiff competition from the likes of Optus, Telstra and TPG. From the 2018 annual report, its fibre, data centre and energy operating segments all saw growth, yet its retail segments continued to decline. Russell had admitted that its retail sector was much less healthier, and hinted at plans to spin that part of the business off in the future. He had been quoted as saying, “I do not see the retail business as core to the future aspirations of Vocus Networks… we’ll have options about whether we spin it off, realise it, operate it.”
Slim margins have forced Russell to stop growing its NBN retail business. The NBN retail market is increasingly being concentrated into Telstra, Optus and TPG, squeezing out other players in the process. In light of this, there are plans to redirect focus into undercutting the NBN with a broadband alternative. Vocus will instead look at bypassing NBN with cheaper mobile fees and fixed wireless alternatives, following the lead of Optus who was also looking into similar options. Vocus also has a deal in place to use Optus’ 5G network, although this does not currently include fixed wireless. Kevin Russell foresees an opportunity in the future to provide fixed line 5G backhaul services to operators such as Optus or Vodafone. Regional mobile towers still require cable laying, a service which Vocus is well positioned to provide due to ownership of extensive telecom infrastructure.
EQT takeover talks fail
Vocus had been the target of a takeover by many potential buyers, including two failed attempts back in 2017 by KKR and Affinity Equity Capital. Utilities firm AGL also had its eyes on Vocus, enlisting the services of Deutsche Bank to provide advice. EQT however pre-empted AGL by offering a takeover bid at $5.25/share at a premium of 35% compared to the price trading in late May. EQT is a Swedish private equity group with extensive experience investing in infrastructure and credit. Following extensive due diligence however, EQT decided not to proceed with the transaction. Analysts have called the offer at $5.25/share a “full price”, and Deutsche Bank estimated that Vocus would need to increase its profit by 70% by 2023 in order to achieve an IRR greater than 15%. The failure of the deal suggested that the share is currently trading at a premium, and prices indeed fell to $3.77/share after the announcement.
Not all hope is lost
EQT’s bid was likely too optimistic and fell short of their expectations of return. It is not all doom and gloom, as many had positive things to say about the firm. Greencape saw, “latent value there which can be realised over time”, while Morgan Stanley’s view was that, “VOC is a good medium turnaround story but the key word is medium term.”
It is important to note that AGL still remains as a potential buyer for Vocus. The failed takeover attempt shouldn’t detract from what Vocus really is. With extensive infrastructure assets and good senior management, the only thing Vocus needs now is time.
By Oliver Ju
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