TPG Telecom Ltd (ASX: TPM) is one of the few in the telco sector that's trading in the black on news that it will become the nation's largest fixed-line broadband provider after industry giant Telstra Corporation Ltd (ASX: TLS).
TPG jumped 0.8% to $9.21 compared with a 0.1% fall in the S&P/ASX 200 Telecomms Index (Index: ^AXTJ) (ASX: XTJ) after iiNet Limited (ASX: IIN) voted overwhelmingly to accept TPG's $1.6 billion offer for iiNet.
The deal will give the merged entity 1.7 million fixed broadband subscribers compared with Telstra's 3 million and Singtel-Optus' 1.03 million.
Depending on what iiNet shareholders opted for, they will either get $8.80 in cash plus a 75 cent special dividend for each iiNet share they hold, or they will receive 0.5533 of a TPG share and $3.77 in cash plus the special dividend.
At TPG's current price, the second option is yielding a better result at $9.60 per iiNet share, or 5 cents above the all cash option.
The merger puts TPG in the box seat in the nation's broadband market as its scale gives it significant bargaining power with the operators of the National Broadband Network.
What's more, margins will likely improve as TPG can put more subscribers on its infrastructure, such as its underwater cable between Australia, Guam and the United States.
You can expect big upgrades of consensus forecasts for TPG as analysts have yet to change their estimates for the merged group.
While TPG's share price has rocketed up 64% over the past year to reflect the potential for the merger being approved, I suspect the upward earnings adjustments that will come through over the next day or so will make the stock look good value still. It won't be cheap but it will not look overpriced given the benefits of the merger.
The average analyst forecast for TPG's 2015-16 net profit is around $270 million, a 13% jump over the previous year and this doesn't account for the merger, while iiNet's net profit is estimated at around $75 million for the current financial year.
In contrast, shares in M2 Group Ltd (ASX: MTU) aren't faring well with the stock tumbling 2.1% to $10.76 this afternoon. M2 Group had made a similarly priced offer for iiNet but it was an all scrip deal, while TPG gave shareholders an option to receive part of the sale in cash.
This was probably why iiNet's board had backed TPG's offer over M2 Group, although the outcome of today's vote was far from certain as a number of iiNet's shareholders have publically stated that TPG's bid undervalues the company.
It would appear the voices of dissent were in the tiny minority as 95.09% of votes were cast in favour of TPG's bid.
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