David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Parts can often be more useful than the whole.

That's one of the basic lessons of modern telecommunications, which is built upon the slicing and dicing of data transmissions into discrete packets that can move more easily over networks. It also helps explain why KKR & Co. is offering A$2.18 billion ($1.6 billion) to buy Vocus Group Ltd., one of Australia's biggest providers of such services.

Wild Ride
The rise, and rise, and rise, and fall of Vocus's market capitalization
Source: Bloomberg

Thanks to a voracious pace of acquisitions, Vocus's market capitalization grew almost 3,700 percent over the five years through last July -- turning a minnow worth around A$100 million into a A$5.3 billion leviathan. A company that was once a small but pure play on wholesale telecommunications through undersea cables, dark fiber and data centers had turned itself into the country's fourth-biggest phone business.

That was driven as much by survival as ambition. Despite the promise that a government-built national broadband network would create a more competitive telecoms market in Australia, the country is increasingly dominated by the big beasts of Telstra Corp., Singapore Telecommunications Ltd.'s Optus, and TPG Telecom Ltd. Smaller players like Vocus had to either grow large enough to compete, or starve.

Dog Eat Dog
There were many takeovers on the road to Vocus's date with KKR
Source: Bloomberg
Note: Deal values based on enterprise value.

In theory, the bolt-on of Amcom Telecommunications Ltd.'s IT services, M2 Group Ltd.'s huge consumer revenues, and Nextgen Networks' wholesale data cables would have turned it into a fitter competitor. That proposition stands and falls, however, on the degree to which management managed to turn Vocus into an integrated business greater than the sum of its parts. If synergies can't be achieved between the different units, then all that dealmaking did little more than pile on debt.

The past 12 months have provided plenty of raw meat for the bears. Last August, James Spenceley, the chief executive officer who led the business through most of its meteoric rise, abruptly sold about three-quarters of his shares. Two months later, he quit the board along with another director, over disagreements about who should run the company.

More bad news was to come. In late November, Vocus forecast that underlying net income in the year through June would be as much as 8.6 percent below the A$224 million analysts were expecting. Last month, that forecast was further reduced, to a range as much as 29 percent below the original analyst estimate.

Levering Up
Analysts' estimate of Vocus's net debt-to-Ebitda multiple have risen close to its 3.5 times debt covenant
Source: Bloomberg, Gadfly calculations
Note: Based on published and median estimated net debt and Ebitda figures. Measures used in calculations of covenant compliance may differ.

The combination of declining profits, chaotic management, and rising borrowings has been fatal to investor faith. Median estimates for net debt to Ebitda at the end of this month have risen from about 1.1 times 12 months ago to 2.8 times now, uncomfortably close to a 3.5 times covenant on the company's debt. The shares had fallen by more than two-thirds over the past year, until KKR's offer drove them up 20 percent Wednesday.

The classic private equity strategy -- selling off peripheral businesses to help pay the acquisition bill before getting down to making the core business work properly -- seems a good way of dealing with this situation. Before the 2015 merger with Vocus, M2's overwhelmingly consumer and corporate-focused phone business had a market capitalization between A$1.5 billion and A$2 billion, barely less than what KKR is offering for the whole company now. 

Sell that off and separate some of the other widows and orphans -- its data center business, or power provider Switch -- and KKR could be left with the core of a good wholesale telecommunications network for a fraction of what it'd otherwise have to pay. That might be an unacceptable retreat for Vocus's existing management, who've pinned their hopes on turning the company into something much grander, but new owners won't be burdened with such sentiment. 

Back to Square One
Vocus is worth no more now than the companies it absorbed were worth three years ago
Source: Bloomberg

Moving Vocus into KKR's junkyard and stripping it for parts seems a pretty solid way of extracting value from this car crash.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. No relation to KKR's rival private equity shop TPG Capital LP.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at