It shredded over $1.5 billion and now KKR wants to buy

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This was published 6 years ago

It shredded over $1.5 billion and now KKR wants to buy

By Brian Robins
Updated

After outlaying more than $3.75 billion on three large acquisitions over the past two years, telecoms operator Vocus Group has found itself in the crosshairs of an unwelcome bid from a leveraged buyout company which values the entire company at just $2.2 billion.

Integration problems which led the ouster of a founder and longstanding chief executive James Spenceley less than a year ago, with the group's subsequent underperformance and an earnings downgrade has prompting widespread criticism of the present chief executive, which has left the company exposed to a potential change of control.

Private equity outfit KKR has made an offer to buy Geoff Horth-led Vocus .

Private equity outfit KKR has made an offer to buy Geoff Horth-led Vocus .Credit: Ben Rushton

Vocus disclosed before the start to sharemarket trading Wednesday it has received a takeover approach from a leveraged buy-out company Kohlberg Kravis Roberts which it described as "preliminary, indicative and non-binding". The offer has been pitched at $3.50 a share, which values the company at just $2.18 billion.

Prior to the mooted offer being unveiled, Vocus shares were fetching $2.86.

Analysts panned the offer as "opportunistic", although with deep concerns about the near term outlook for earnings, sharemarket investors were on the back foot, with Vocus shares only briefly topped the $3.50 level, touching a high of $3.51. The shares closed the day at $3.48, up 22 per cent on the day.

Vocus shares have fallen heavily from their high of $9.41 a year ago, due to a series of missteps as it has sought to transition from a wholesaler in the telecoms market to also serving the retail market. Vocus operates the Dodo and iPrimus brands, among others.

Soon after the shares peaked, the company went to shareholders to raise funds at $7.55 a share to acquire Nextgen Networks. Its subsequent woes have prompted a loss of faith in management by some analysts. A recent earnings downgrade further shook investor confidence in the company.

Vocus merged with M2 in a $2.25 billion deal in mid-2015, which it followed up with a $700 million deal to merge with Amcom in early 2016. Both of these deals were scrip-based mergers, while the $800 million acquisition of Nextgen was a cash deal.

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Vocus has expanded rapidly with a series of acquisitions, but it gave investors a reality check last month when it warned that the underlying net profit for the year to June would run at $160 million to165 million, well short of the $205 million to 215 million guidance. That warning saw the shares dumped, falling to long term lows of $2.35 in May.

"It is friendless at the moment," one advisor said. "It has taken time and money to build the assets it now controls. But when will shareholders see the value - will that be twelve months away or 24 months away?"

Analysts with Citi described the KKR move as an "opportunistic offer based on depressed earnings", although the question for shareholders is will competing bidders emerge.

"When the ACCC approved the merger of TPG Telecom and iiNet, it suggested it would be unlikely to allow further consolidation amongst the four big retail broadband providers (Telstra, Optus, TPG and Vocus," Citi told clients. "After those four the only remaining telco of scale is Vodafone.

"In our view a competing bid from a trade buyer is unlikely, however we cannot rule out interest from another private equity firm."

Company advisors said an issue yet to be clarified is whether the Vocus board will allow KKR to conduct "due diligence", which gives the bidder access to confidential information about the company's operations, enabling it to finalise a takeover offer.

Prior to the approach from KKR, only two analysts who follow Vocus had 'buy' recommendations on its shares - Morningstar and APP Securities. All other analysts had either 'hold' or 'sell' calls.

Vocus said it has formed a board committee to assess the buy-out proposal.

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