Analysts are cautioning TPG Telecom investors about gaining “too much exuberance” over the $6.3bn offer from the Macquarie-backed Vocus Group for its fibre assets.
“In fact, we caution investors against too much exuberance on the offer, given the current economic and credit market volatility, despite what the buyout equity market may suggest,” the analysts said in a research note.
“After all, Vocus still needs to get debt financing, and due diligence is always a fertile ground to begin the price haggling process.”
The company confirmed on Tuesday that Vocus Group, which was purchased in 2021 by Macquarie Asset Management and Aware Super for $3.5bn, excluding debt, was in exclusive talks to buy TPG’s non-mobile fibre assets for about $6.3bn including debt.
Its exclusive due diligence period would end on September 6, with Vocus making the offer some months back while considering a $1bn acquisition of its Vision Networks business that connects homes to the internet.
The Vision business has failed to find a buyer.
TPG Telecom says the discussion between the parties remains incomplete and transaction terms are subject to ongoing negotiation, and the company has not made any decision to accept any offer.
Ord Minnett said that the $6.3bn offer valued TPG’s fixed-line fibre assets at 11.5 times earnings before interest, tax, depreciation and amortisation.
This Is in line with the 11.6 multiple that Vocus itself was acquired for by MIRA and Aware Super in June 2021.
The analysts said it showed the unfazed appetite for good-quality infrastructure rich businesses, despite the substantial rate rises in recent periods.
The Ord Minnett research note said that if the deal was consummated, the current stock price, even after the 12 per cent rally on Tuesday, still valued the rest of TPG’s business at just 7.2 times forecast annual EBITDA.
“That is still too low, as we see material earnings recovery potential for both mobile (70 per cent of TPG’s gross profits excluding fixed infrastructure businesses) and consumer fixed-line operations (mainly national broadband network resale but with growing fixed-wireless).”
The analysts believe the earnings of the units would increase about 9 per cent on a compound rate over three years.
But they believe if the deal happened, it was possible it would unlock value, with a rerating, driven by investors recognising the tailwinds in the mobile space, such as Covid-19 impact reversal, price increases, competitive rationalisation and more revenue from 5G.
They said that, at the least, the offer redirected investor attention to the value of “hard” assets within TPG.
They said this was something that has been even more overlooked in the aftermath of the recently kiboshed regional mobile network-sharing deal by the competition regulator.
Meanwhile, Morgan Stanley analysts say while a sale would reduce debt, which would be positive, they believed the remaining TPG business was of lower quality and lower growth, which warranted a de-rating.
Higher debt has triggered asset sales by TPG, including its mobile towers in 2022 for $1bn to Canadian pension fund OMERs.
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