Two of the most revered managers in the telecommunications space are locked in a head-to-head battle for iiNet Limited (ASX: IIN) in what is probably going to be one of the most interesting merger deals of the year.
On the left and weighing in with a market cap of $2.1 billion is M2 Group Ltd (ASX: MTU), which this morning revealed that it is offering to buy iiNet for about $10 a share; while on the right we have the $7 billion TPG Telecom Ltd (ASX: TPM) with its $8.60 a share offer that it made last month.
The attempted acquisition of iiNet is arguably the most daring takeover attempted by M2 Group and shareholders will need to be watching carefully as the cost of a misstep will be high even though it feels like TPG is already the big loser as its shares crashed 7.9% to $8.84 on news of the bidding war.
M2 Group is offering to swap 0.803 of its shares for each iiNet share and pay a 75 cent a share special dividend. M2 Group's shares are in a trading halt and it closed on Friday at $11.52.
M2 Group's share price could come under pressure when trade resumes as shares in the bidder usually fall on takeover news, particularly if it is an all-scrip deal.
But the implied offer price for iiNet is still going to be well ahead of what TPG is offering, even though an all-cash bid (which is what TPG is offering up) is often regarded as the superior option.
M2 Group has proven itself to be a very astute acquirer of assets, while TPG has shown itself to be an incredibly savvy operator that knows how to smell out and buy great bargains.
The ball is in TPG's court and it remains to be seen if the telco will come back with a sweetened offer for iiNet, although TPG's chief executive David Teoh has a reputation of never paying too much for anything.
There are a few reasons why I feel this is the boldest, if not riskiest, deal for M2 Group. The sheer size of the acquisition is the obvious one, but the $1.6 billion proposal comes just two weeks after the group announced a $245 million takeover of New Zealand-based Call Plus Group.
Some might point out that M2 Group has successfully pulled off back-to-back deals. For instance, the group's buyout of Commander Communications assets in 2009 comes hot on the heels of its takeover of People Telecom, but the scale of the Commander deal paled in comparison at $19 million.
More importantly, the takeover of iiNet will move M2 Group into unfamiliar territory as the latter regards itself as a marketing company that is good at reselling services and not owning and operating infrastructure.
Owning iiNet will change that.
M2 management estimates that the synergies (such as cost savings and cross selling opportunities) of the merged entities stand at $538 million.
TPG has not revealed the synergies of the deal but some analysts think it is worth close to $100 million over the next two years.
Given M2 Group's track record, I am tempted to give management the benefit of the doubt but as a shareholder of M2 Group and iiNet, I would prefer to see iiNet sold to TPG on a cash offer that values iiNet closer to the $10 mark.
