M2 Group Ltd (ASX: MTU), the owner of Dodo and iPrimus, has reportedly lodged a competing offer for internet services provider iiNet Limited (ASX: IIN) which could indicate the beginning of a bidding war.
Although it has not yet been confirmed on the ASX's website, the Fairfax press has reported that the fast-growing M2 Group made an all-scrip offer for iiNet valuing the business at more than $1.5 billion. That comes just over six weeks after TPG Telecom Ltd (ASX: TPM) made an all-cash offer, valuing the business at $1.4 billion.
A scrip bid is a takeover offer whereby shares are offered in the place of cash. While the deal might look superior at face value (any investor would prefer to receive $1.5 billion than $1.4 billion for their company), iiNet's board of directors will need to establish an appropriate value for M2 Group's shares to determine whether or not it is actually in the best interests of shareholders.
As it stands, M2 Group's shares are currently trading at $11.52, having surged a remarkable 108% over the last 12 months (and 570% over the last five-years). Meanwhile, iiNet's shares are trading at $8.66, giving the company a market value of $1.41 billion, according to Google Finance.
A bidding war?
When TPG Telecom made its initial bid for iiNet on 13 March, the market reacted enthusiastically, sending shares of both companies soaring higher. However, iiNet's majority shareholders have since expressed their distaste for the deal, stating that the offer price was too low considering the enormous synergies that would be realised by TPG.
According to an official presentation by TPG Telecom, the acquisition of iiNet would increase TPG's broadband subscriber base to over 1.7 million customers, reduce operating costs and become immediately earnings per share (EPS) accretive for TPG's shareholders. Its offer price of $8.60 per share represented a 33% premium over iiNet's one month VWAP (volume-weighted average price).
Under the agreement between iiNet and TPG Telecom, iiNet must inform TPG if any rival bids are lodged in order to give TPG Telecom the opportunity to make a counter offer.
Given that there has been no official word on the takeover bid just yet, it is unclear how the market will respond. Of course, the prospect of a bidding war is great for iiNet and its shareholders, but not so good for TPG Telecom in that it could be forced to sweeten the deal, or else miss out on those synergies mentioned above.
Meanwhile, it is also unclear whether M2 Group would recognise the same level of benefits, or whether shareholders will approve of another big acquisition.
One thing is for certain however: Australia's telecommunications industry could be about to fire up.
