The friendly merger between Vocus Communications Ltd (ASX: VOC) and M2 Group Ltd (ASX: MTU) will see M2 shareholders receive 1.625 Vocus shares for each M2 share they currently hold.
But Vocus appears to have timed the deal perfectly after M2's share price sunk 40% since late April, from an all-time high of $11.79 to just $8.32 in early September. That suggests the original deal, worth around $10.55 at Vocus's last closing price of $6.49 (close to a 52-week high), is not that great.
I've worked up a small table with some of the values M2 shareholders will receive based on Vocus' share price below.
| Vocus Share price | M2 shares value |
| 7.00 | 11.38 |
| 6.50 | 10.56 |
| 6.25 | 10.16 |
| 6.00 | 9.75 |
Clearly, Vocus's share price would have to soar above $7.00 for M2 shareholders to receive value worth close to this year's high price.
I realise price isn't everything. A combined Vocus/M2 has more scale to take on the likes of TPG Telecom Ltd (ASX: TPM) – fresh from its acquisition of iiNet Limited, as well as Optus and the giant of the industry, Telstra Corporation Ltd (ASX: TLS). There will be synergy benefits as well, around $40 million per annum according to the presentation, with the combined group able to cut out some redundant costs post-merger.
It also prevents TPG from scooping up either Vocus or M2 – although TPG could still make a higher bid for M2. That appears unlikely in my view – with the Australian Competition and Consumer Commission (ACCC) already saying it would take a dim view of further consolidation in the retail broadband sector. Both TPG and M2 are heavyweight providers of retail broadband services.
TPG is still a substantial shareholder in Vocus, after taking a stake in the company in an attempt to block Vocus' merger with Amcom and now owns 7.9%. It's possible TPG could make a successful bid for Vocus, leaving M2 on the outer.
Personally, I think the Vocus/M2 merger makes sense. As a shareholder in both, I don't want Vocus to overpay either. But shareholders in M2 alone might feel dudded by the current offer price.
Foolish takeaway
We'll have to wait for the independent expert's report to see whether the offer is within fair value, but I wouldn't be surprised if it's in the ballpark.
