As reported by The Australian Financial Review today, speculation is mounting that global telecommunications network owner and operator, Vocus Communications Limited (ASX: VOC) could be a takeover target.
Vocus' announcement of a proposed acquisition of rival telco, Amcom Telecommunications Limited (ASX: AMM), in late 2014 saw shares in both companies jump significantly higher.
However, following TPG Telecom Ltd's (ASX: TPM) $1.4 billion takeover offer for fellow internet service provider iiNet Limited (ASX: IIN) earlier this month, some financial commentators are now suggesting Vocus – which will be worth an estimated $1.1 billion if/when it acquires Amcom – will become the next target of a takeover.
There is speculation M2 Group Ltd (ASX: MTU) – the owner of Dodo, Primus and Commander brands – could be a likely suitor.
But as the largest of the telco community – excluding Telstra Corporation Ltd (ASX: TLS) – TPG Telecom could again turn to acquisitions once its iiNet takeover is complete. However, this will likely take a number of years.
As for M2 Group, whose market capitalisation is approximately $1.9 billion, it may have the ability to take on an acquisition like Vocus but the key will be determining just how much synergies could be derived from such a large purchase.
M2 Group is an infrastructure light telecommunications company and is currently focused on diversifying it utility offering. For example, M2 Group is now offering insurance and power and gas to its mobile and internet subscribers.
Vocus, on the other hand, is a leading fibre network and data centre operator whose key assets are located across Australia and offshore, connecting Australia and New Zealand to the internet backbone in the USA.
Personally, I think Vocus would be a much better fit for the combined TPG Telecom/iiNet than it would for M2 Group.
Either way, investors shouldn't base their investment thesis on a deal taking place.
Is it time to buy telecommunications stocks?
I'm apprehensive about buying stocks in any of the four telcos currently in takeover talks (i.e. Amcom, Vocus, iiNet and TPG). However, I continue to see value in M2 Group shares over the long-term.
But before buying shares in any of Australia's telco's I think its paramount investors understand where the industry is likely to head from here.
With ongoing industry consolidation and the rollout of the National Broadband Network (NBN) underway, the Australian telecommunications industry will become commoditised over time. Meaning, once everyone's done acquiring each other, they'll turn to fighting amongst themselves for subscribers. As a result, profit margins will likely fall. Indeed, whilst each of the above companies will benefit from the increasing use of internet-enabled devices (think: smart homes, driverless cars etc.), I think investors would be wise to consider this as a likely outcome for the industry.
