Traders Bet on Sweetener for Australian Internet Deal: Real M&A

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Traders are betting it will take a higher price to seal Australia’s biggest telecommunications takeover in almost four years.

IiNet Ltd.’s board last month agreed to an A$8.60-a-share takeover by TPG Telecom Ltd., valuing the Internet provider at A$1.4 billion ($1.1 billion). Yet IiNet’s largest investor and its co-founder, Michael Malone, both say the offer is inadequate. The deal needs shareholder approval at a meeting scheduled for June.

The tie-up would turn TPG into Australia’s second-largest broadband provider, and local competitors Singapore Telecommunications Ltd. or M2 Group Ltd. may emerge as counterbidders, according to UBS Group AG. IiNet yesterday closed 3.3 percent above TPG’s cash offer, a signal traders expect the company will ultimately win a higher price -- either from TPG or another bidder.

“People expect there may be a competing offer,” said James Santo, a special situations sales trader at Aviate Global LLP in Sydney. “There are no other opportunities of scale and you just cannot replicate these assets now.”

Malone, who stepped down as IiNet’s chief executive officer last year, dialed into a March 23 investor call with IiNet Chairman Michael Smith and CEO David Buckingham and voiced his frustrations over the agreement with TPG.

“It’s been incomplete, unprofessional and reflects poor diligence,” Malone said. “It’s bad for shareholders, it’s bad for staff, it’s bad for our customers.”

‘Tooth and Nail’

Sydney-based TPG, which owns 6.25 percent of IiNet, could pay A$10 for each IiNet share without hurting its earnings, said Santo. The A$8.60-a-share offer on March 13 was 26 percent higher than IiNet’s closing price the previous day. IiNet shares had touched A$8.50 as recently as November.

TPG, led by founder David Teoh, or another Australian Internet provider has the scope to cut costs at Perth-based IiNet, as well as instantly grab almost 1 million customers. That means the company deserves a fatter takeover premium, said Paul Hannan, head of smaller companies at BT Financial Group, IiNet’s largest shareholder.

“That’s the sort of thing we would normally expect a board to fight tooth and nail for,” Hannan said by phone. “You don’t have to be Albert Einstein to work out that David Teoh has timed this at a low point for the IiNet share price.”

IiNet shares Thursday rose 0.1 percent to A$8.89 at the Sydney close. TPG climbed 0.9 percent and M2 gained 1.3 percent.

Buying IiNet gives a rival the chance to trail only Telstra Corp. in the domestic broadband market. Australia’s former phone monopoly led with 46 percent market share last year, according to estimates by UBS. IiNet’s market share in 2014 was about 15 percent, higher than TPG’s 12 percent. Singapore Telecom-owned Optus had 16 percent and M2 had 8 percent.

Shareholder Opposition

“The certain cash value the offer provides is compelling compared to a risked valuation of the company into the future,” IiNet Chairman Smith said in an e-mail. “Many shareholders, commentators and analysts appear to support our view on value.”

A representative for TPG declined to comment on the possibility of a higher offer, as did spokeswomen for Singapore Telecom and M2.

The agreement with TPG bars IiNet from encouraging or talking to another suitor. IiNet’s Smith said on the investor call that those conditions don’t prevent another suitor from making a better offer.

Tax Benefits

It’s not clear whether asset manager BT, which owns about 6.28 percent of the company, will vote against the proposal in June, or even if there’s enough opposition to block the deal. It needs support from 75 percent of IiNet shareholders by value, and 50 percent by volume.

IiNet shares, sitting above the offer price, may also reflect a special dividend IiNet plans to pay that includes certain Australian tax benefits. Those credits might swell the value of the offer for eligible investors to A$8.79 a share, UBS analyst Eric Choi in Sydney estimated in a March 13 report.

All the same, TPG’s stock price surged 21 percent since the agreement was announced through Wednesday, adding A$1.3 billion of market capitalization.

The jump suggests investors believe TPG is landing “quite a bargain,” Bradley Clibborn and Michael O’Meara, analysts at Credit Suisse Emerging Companies Pty in Sydney, wrote in a March 13 note.

M2 is the most logical counterbidder and TPG might increase its own offer rather than let IiNet slip away, they said. Either company could pay as much as A$10 a share and boost earnings, Clibborn and O’Meara wrote. They expect the bid to rise to A$9.50 a share.

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