Shares in internet market target iiNet surged again today to a new intra-day high before closing at around $10 each in line with yesterday's formal bid from M2 Group.
Long mooted as a potential rival to TPG Telecom’s $1.4 billion mid-March cash bid, which was lashed by some shareholders, including iiNet’s founder Michael Malone, M2 yesterday made a scrip and cash bid of $1.6 billion in an attempt to win over the shareholders of Australia’s third biggest internet service provider.
M2 believes its offer meets some of the key criticisms of those most angered by the iiNet board’s acceptance of the TPG offer. The benefits cited by M2 are: increased value; fewer tax implications; and a chance to share in the upside of the merger, as they would hold 42 per cent of the combined entity.
However, the scrip-nature of the bid means that it is directly subject to market sentiment. Shares in M2 have fallen since the announcement, valuing its total bid at $1.52 billion or $9.37 a share.
M2 has high-profile consumer brands iPrimus and Dodo as well as the Commander business brand and a wholesale division.
At the very least, M2’s offer muddies the waters for TPG. The competing bid is not only likely to provide food for thought for iiNet investors and potentially force TPG to increase the price for its bid; it may also delay what was otherwise looking like a smooth deal process, allowing additional parties to further consider their stances.
A match-up between M2 and iiNet would not create anything like the major third force in Australia's IT and communications sector proposed by TPG. At just under $2 billion, M2 is not much bigger than iiNet, when the new bid price is considered, whereas TPG has a market capitalisation of around $7.2 billion, due in part to its significant diversification into cable ownership.
That the market has marked down M2 shares since its bid - from $11.52 each at Friday's close to $10.74 today - indicates that at least they feel there is a fuller takeover premium in the offer. That is in stark contrast to TPG’s bid which saw its share price rise along with iiNet’s, suggesting a bargain was being had. TPG's share price has dropped since the M2 offer was confirmed this week.
|Details||Cash $8.60 per share and 10.5 cent per share dividend retained by iiNet shareholders||Scrip 0.803 M2 shares per iiNet share (valued at $9.25 per share on trading prior to the announcement) and cash 75 cents per share|
|Tax||Capital gains tax implications||Tax deferment on capital gain|
|Other||Debt-funded, risk and upside with TPG (37% David Teoh)||Risk and upside shared between M2 58%/iiNet 42%|