commentary Telecom New Zealand was yesterday saying nothing about Pacnet's alleged offer to buy its Australian arm AAPT for US$420 million in cash and shares.
But if the offer is genuine and on the terms laid out in the Reuters story, then Telecom New Zealand chief executive Paul Reynolds ought to agree to the offer as quickly as he can.
The metrics of the offer should be absolutely compelling for Reynolds, whose short tenure as chief executive has been marked by a series of profit downgrades.
AAPT, which is the third-largest telecommunications company in Australia, is in the TNZ books at NZ$270 million after being subject to about NZ$2 billion in write-downs over the past few years.
Pacnet is effectively offering about NZ$800 million for a business that is cash-flow negative, has costs growing faster than revenue and has margins of less than 7 per cent. Underlying margins in the latest quarter were only 5.2 per cent.
It is difficult to see what synergies are available to Pacnet to make the acquisition work.
AAPT has been put up for sale by Telecom NZ twice before in 2006. On both occasions there were a few tyre kickers but nobody was interested in putting cash on the table.
The business has struggled to find a credible strategic direction. It has blown hot and cold on consumer broadband and mobiles. Its consumer image suffered a severe blow when a new customer service system caused a flood of complaints.
AAPT's business and wholesale network operations were supposed to step up a level after the 2007 purchase of PowerTel for $357 million. Former PowerTel CEO Paul Broad was appointed to run AAPT, but analysts have become frustrated at his failure to deliver improvements in the Australian business.
Patience has been running out because of persistent quarterly profit disappointments.
Pacnet may be able to see something in AAPT that others don't. Why else would it be offering to pay an enterprise value to EBITDA multiple of about 7.5 times? Telecom New Zealand itself is trading at an EV to EBITDA multiple of 3.8 times, while international comparisons are 4.5 times according to Citigroup.
It is difficult to see what synergies are available to Pacnet to make the acquisition work. Pacnet has an ISP in Australia that might slot into the AAPT consumer business, and it offers data and network services as well as hosted applications for business. But its primary business is a fibre network in Asia.
Pacnet may well have broader ambitions in Australia. Perhaps the figures being quoted for AAPT include the cost of a consolidation play.
Australia's third-tier telco sector is ripe for someone to consolidate various businesses. Futuris is selling its 23 per cent shareholding in Perth-based Amcom Telecommunications, which owns fibre networks in Perth, Adelaide and Darwin. That stake is worth about $10 million.
Amcom owns an 22 per cent shareholding in retail broadband supplier iiNet which is worth about $40 million. AAPT owns about 18 per cent of iiNet. However, cleaning up that disparate group of shareholdings would probably involve paying a premium to take out minority shareholders.
The other wild card in the alleged Pacnet offer is the offer of shares as currency.
It is doubtful that Reynolds at Telecom New Zealand would want a minority stake in a Nasdaq-listed telco. But if the price for that stake was NZ$400 million in cash he ought to jump at the offer.
This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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