The $5.25 per share cash takeover bid for Vocus Group Ltd (ASX: VOC) from Swedish private equity group EQT Infrastructure has set a fire under the dark fibre internet services sector today, with the TPG Telecom Ltd (ASX: TPM) share price up 3.2% to $6.45 in response to the news.
The Vocus share price is up 20% to $4.65 on the news, which is more than 10% below the offer price to suggest some investors are far from convinced EQT will complete the deal at $5.25 per share.
Either way the bid demonstrates how fibre-optic internet infrastructure assets are attractive assets as they are long life cash cows positioned to take advantage of rising demand for internet connectivity and data services. As such they can conceptually be thought of as similar to toll roads (only underground) in that they operate on high gross profit margins, tend to have monopoly-like advantages, and require little in the way of operating expenses or capital investment once completed.
That's why I was originally quite keen on both Vocus and TPG as investments, although I missed the wrecking ball effect of the government's NBN networks on these companies' business models – in particular after Vocus and the M2 Group merged.
TPG itself has extensive dark fibre infrastructure assets largely via its $373 million acquisition of Pipe Networks in 2009, while another fibre-optic asset start-up in Superloop Ltd (ASX: SLC) is also marginally higher today.
The TPG share price may be up today, but it's still down significantly this month due to the decision of ACCC chair Rod Sims to block its merger with Vodafone Australia on the basis of an overreaching interpretation of the law and facts in concluding a merger would lessen competition in Australia's mobile sector.
While I expect the courts will throw out the ACCC's imbecilic conclusion, I wouldn't suggest buying TPG shares in the meantime as it looks in trouble now it cannot use federal government banned Huawei equipment for its network build out, while still facing the problem of declining home broadband margins.
EQT will also have to get permission from the Foreign Investment Review Board (FIRB) to complete the Vocus acquisition, with the fact that its assets such as the Australia Singapore Cable are geopolitically sensitive making the approval far from a rubber stamping process.
