M2 Telecommunications: Acquires Primus Telecom

The telecomms pac-man takes another bite

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published April 16, 2012 5:33 pm AEST

What: M2 Telecommunications Group (ASX: MTU) has announced today that it is acquiring Primus Telecom Holdings for an all-cash price of $192.4m. The company also announced a fully underwritten renounceable entitlement offer to raise approximately $83m, partly to fund the acquisition and is also borrowing $140m.

Shareholders will be eligible to purchase one share for every four shares they hold, at a price of $2.66, a 23.8 per cent discount to the closing price of the company's shares on the ASX on 13^th April 2012. The offer will be sent to eligible shareholders on 27^th April, with the offer closing on Friday, 11^th May 2012.

The acquisition of Primus give M2 approximately 165,000 customer contacts, as well as well-recognised and trusted iPrimus and Primus brands; and the national Primus network, including data centres and metro fibre rings.

On a pro-forma basis, the acquisition would have increased M2's underlying EPS by 8.6 per cent and increased free cash flow per share by 22.8 per cent. M2 expects the acquisition to contribute favourably to earnings in financial year 2013, with the combined business presenting significant opportunities to realise synergy benefits, estimated in excess of $5m per year.

Primus recorded $280m in revenues and $40m in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the 2011 calendar year. M2 has therefore paid less than five times EBITDA for the company, which doesn't appear expensive.

2012 Guidance

M2 also reaffirmed its financial year 2012 guidance, with revenues expected to be between $380m-$420m and Net profit after tax to be between $30m and $34m.

So what: As M2 states in its presentation, it gives the business more scale in the lead up to the NBN rollout and potential buying leverage with suppliers as a larger group. M2 gains three data centres from Primus, and optic fibre rings in five of Australia's major cities (Perth, Adelaide, Brisbane, Melbourne and Sydney).

The acquisition also diversifies the M2 Group further, with the pro-forma business segment contributing approximately 52 per cent of revenues, with residential contributing 32 per cent, wholesale contributing 6 per cent and 2 per cent other.

Now what: All in all, I see this as a good move for M2, gaining additional retail, business and wholesale customers, data centres and optic fibre networks. While net debt will increase from $9.7m to $137.7 post acquisition, M2 has mentioned that it will consider the use of surplus cash to accelerate the repayment of the debt, while aiming to maintain a dividend payout ratio policy of 70 per cent of net profit after tax.

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Motley Fool contributor Mike King owns shares in M2. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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