M2 Group Ltd jumps to record high on $245m acquisition: Here's what you need to know

This latest deal adds to the merger and acquisition frenzy in the telecommunications sector. But analysts are likely to welcome M2 Group Ltd's (ASX: MTU) acquisition. Here's why.

Brendon Lau

Brendon’s passion for shares started by accident in 2003 and he has worked in various roles around capital markets ever since as a trader, stock analyst and markets reporter with the Australian Financial Review. Most of his wealth has come from share investing than any other asset class, and that has given him the financial freedom not to work full-time, if he chooses to. Brendon is a medium to long-term investor who aims to hold positions for a year or longer and is focused on fundamental analysis, although he will occasionally use technical indicators to time his entries and exits. Brendon has an MBA from Melbourne Business School and is RG 146 certified. He lives in Melbourne with his wife, three kids and two dogs.

Published April 13, 2015 1:52 pm AEST

Investor excitement in the telecommunications space kicked up a notch with shares in M2 Group Ltd (ASX: MTU) surging to a record high this morning.

M2 is poised to become the third largest broadband and fixed voice service provider in New Zealand as it acquires Call Plus Group and its related entity 2Talk Limited for $NZ250 million ($245 million).

The deal is forecast to lift M2's earnings per share (EPS) by 15% in 2015-16. Consensus EPS forecast for that year is 59.33 cents.

Investors can also expect a similar lift in dividends per share given that management is keeping to its payout policy of 70% of net profit.

The stock jumped 8% to $11.27 and M2 should deliver a yield of around 5% in 2015-16 if franking credits are included.

The acquisition looks attractive and is likely to be warmly received by analysts. The price paid is 5.6 times earnings before interest, tax, depreciation and amortisation (EBITDA) and more importantly, Call Plus appears to be a good fit for the group.

The revenue and product mix offered by Call Plus are alike to M2 (apart from M2's energy business) and management says the corporate culture between the two is also similar.

Investors shouldn't underestimate the importance of the two factors as many acquisitions fail to deliver to expectations because of these issues.

What's more, M2 now has a new growth avenue given that the New Zealand market is relatively immature.

This deal will add to the merger and acquisition (M&A) frenzy in the telco sector that I wrote about last week when Singapore Telecommunications Ltd (ASX: SGT) made a $1.1 billion play for Trustwave.

We also won't forget that iiNet Limited (ASX: IIN) is being stalked by TPG Telecom Ltd (ASX: TPM) in another billion dollar plus deal.

M2 itself has been touted as a potential target itself but the question is whether the Call Plus acquisition will make any potential takeover proposal for the group less likely.

In a sense yes, but it is also important to note that M2, unlike other notable targets in the sector, is not an infrastructure company but a marketing group.

From that perspective, the list of potential acquirers in Australia is a lot shorter than one might suspect.

Nonetheless, I am expecting to see more corporate action in this sector.

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