The merger and acquisition activity in the junior telco sector continues to ramp up with the announcement that dark fibre provider Superloop Ltd (ASX: SLC) is set to acquire wireless internet specialist BigAir Group Ltd (ASX: BGL).
This deal comes as a surprise to me as Superloop is still at the loss-making startup stage after posting a full year EBITDA loss of $5.6 million for the full year ending June 30 2016. Moreover, until the announcement of this deal it was an Asia-Pacific company focused on investing to build fibre-optic networks across Asian and Australian metropolises to serve enterprise customers in high-urban-density cities like Brisbane, Singapore and Hong Kong.
BigAir Group's willingness to throw its lot in with Superloop via an all scrip or cash and scrip offer is also interesting, with BigAir being a profitable wireless internet specialist that has been expanding into the cloud services market.
The proposed deal
Using Superloop's September 13 share price of $3.31 it will offer BigAir shareholders an all scrip offer of 0.371 Superloop shares for every BigAir share held, or 70 cents cash and 0.118 Superloop shares for every BigAir share held.
The alternative offers valuing BigAir scrip at $1.23 or $1.13 respectively are at a 46% and 30% premium over the 84 cents one-month weighted moving average price of BigAir shares.
The large premiums reflecting the fact that BigAir shareholders are being asked to throw their lot in with the loss-making Superloop, with the offer price relative to Superloop's own valuation that has surged 83% over just the last six months.
I would not be surprised to see the majority of BigAir shareholders take the majority cash option which has been subjected to a $95 million cap on the amount of cash that will be paid, with potential for a pro rata scale back if too many shareholders elect to receive the cash and scrip offer.
To fund the cash part of the deal Superloop plans to raise around $65 million from institutional investors at an offer price of $3 per share, which represents a 9.6% discount to Superloop's September 13 $3.31 closing price.
Foolish takeaway
In my opinion these two companies don't look classic merger candidates with BigAir a wireless internet specialist via its microwave technology that provides enterprise customers wireless internet connections on closed loops via transmitter connections. While, Superloop has been focused on the construction of physical fibre-optic networks, although both companies are involved in the provision of cloud services. In terms of synergies BigAir's presentation states that the deal could deliver $4 million in annual cost savings across corporate overheads and network services.
Investors are being asked to place much faith in the management expertise of the respective companies and neither of these businesses are attractive investments at current valuations in my opinion.
