Will Kevin Russell and Vocus board want to hand over keys?

Vocus Group chief executive Kevin Russell has the company running in good shape. Picture: Hollie Adams

Kevin Russell ranks as one of the best telco executives in Australia, having done time in all the ­majors, and now faces his third takeover within his first three years at Vocus.

This one actually has some credibility to it, but the real talk on prices has yet to begin.

Before Monday’s bid from Macquarie Infrastructure, Vocus was trading at $4.38 a share with an equity value of $2.7bn.

It jumped to $5.04, or $3.1bn on news of the Macquarie interest, which is below the indicative $5.50 bid price.

The market uncertainty is based on the fact the prior bidders walked early, but Macquarie is further down the track than previously indicated.

The question is whether, having done the hard yards, Russell and his board want to hand the keys to Macquarie.

Vocus’s stock closed up 12.8 per cent at $4.94 on the new bid, but the price will need to have a six in front to excite Vocus chair Bob Mansfield.

At last year’s annual meeting, Mansfield told shareholders: “The execution risk is largely behind us and the foundations for growth are firmly in place.”

He also stressed that, “in my experience, culture trumps strategy in business, and Vocus is building a challenger culture that delivers for our customers, cares about our people, and is accountable for financial performance”.

They are surely not the words of someone who will simply hand the keys to Macquarie.

In a recent note, New Street’s Ian Martin said: “We see digital densification as a growing theme through the 2020s as more sites (offices, shopping centres and remote sites) are connected to digital networks and services and require fibre backhaul and front-haul connections.”

This includes regional areas where Vocus could with its own spectrum come into its own in the wholesale market.

Martin noted: “We think the scope of network requirements is significant and likely beyond the financing capacity of the key network operators Telstra, Optus and TPG with Vocus.”

In early 2019, when Russell was new to the job, he received an indicative bid at $5.25 a share from private equity player EQT and another at $4.85 from AGL. Both bidders walked. The market wondered whether there were hidden demons, but the issue now is more about uncompensated value transfer, with Russell two years into the job under the equally experienced Mansfield.

The company was a classic roll-up with one too many acquisitions, but Russell has removed much of the execution risk.

While the first two looks were opportunistic, the Macquarie offer is being treated seriously.

Macquarie already owns Axicom, a telco towers business, and AirTrunk, a data services company, so the Vocus fibre would round at the assets nicely. Vocus is growing its fibre earnings at a time when Telstra, Optus and TPG are all mobile-focused and in one way or another capital-constrained.

Vocus is primed to sell its New Zealand business through either a float or asset sale, and Russell has the company at the end of a three-year turnaround.

This means the value add comes from synergy with others assets or its own fibre growth path.

Both of these choices are in Macquarie’s corner, which makes you think this time Vocus will get a formal bid and may well change hands at the right price.

UBS analyst Eric Choi has a price target on the stock at $4.45, which values the prized fibre network at 10 times earnings, suggesting Macquarie is basing its potential bid at 13 times.

The company has three divisions. Its fibre network or network services is tipped to report earnings this year of $247m on revenues of $666m.

Its New Zealand assets on the auction block are tipped to earn $65m on sales of $388m, and retail $60m on $608m in revenues.

These numbers show you the jewel in the crown is fibre, which Russell has said is the core of the company. In recent interviews with this column, he has flagged “our fibre network is positioned to deliver strong growth in 2021”.

“Vocus has market momentum and our reputation for delivering for our customers is growing,” he says.

Macquarie’s interest is obviously the fibre network built on the old Next Gen business created by Leighton a couple of decades ago, which fits neatly with its existing assets.

Ford’s wine woes

TWE’s Tim Ford faces the dual impact of COVID-19 and China when he releases his half-year results on February 17 that on consensus estimates will be about $445m — down some 35 per cent from the $681m reported in the 2019 fiscal year.

The latter was the near-term earnings peak for TWE and arguably also the last “normal” year.

In the 2020 full year, earnings fell from $366m in the first half to $167m in the second because COVID shut high-end restaurants and the pandemic shock was at its peak, so punters hadn’t transferred into the more recent habit of drinking better-quality wines ($20-plus a bottle) at home.

Then came China and the ­latest Wine Australia figures show sales to China fell from $173m in December 2019 to $4m in ­December last year. In November, when the tariff duties ranging up to 212 per cent were imposed, sales fell from $135m to $58m.

Treasury Wine Estates CEO Tim Ford. Picture: Aaron Francis

Ford’s predecessor, Michael Clarke, was working on the spin-off of the Penfolds brand on the reasoning that it accounts for about 10 per cent of volumes and 50 per cent of earnings.

In the 2019 year, the company sold 35 million cases of wine, with Penfolds being 3.5 million cases earning $360m and the other 31.5 million cases about $258m.

But China and COVID have sadly put the boot into the Penfolds value train, which is why Ford is adamant the Clarke demerger is off the table.

Ford will keep the dream alive by proceeding with an internal divisional split in the 2022 year.

He will talk more about premium than simply Penfolds in one division.

The move arguably will make the eventual split easier to achieve, but in the midst of a 35 per cent fall in earnings over two years the shuffling of the decks is also called window dressing.

Shareholders can rightly expect more concrete plans to actually grow earnings.

UK watchdog to speak

ACCC boss Rod Sims will have a fellow traveller address the trade practices mafia on Tuesday night in the annual Bannerman lecture with UK Competition and Markets Authority chief Andrea Coscelli presenting.

Coscelli has just wrapped Clydesdale Bank on the knuckles for insisting small businesses open an account if they want to borrow the up to $90,000 available under the UK government’s COVID bounce-back package.

The CMA said this breached Clydesdale’s undertaking on the deal.

It is undertaking a major study of platform algorithms as part of a crackdown on the big digital platforms. Coscelli argues “any transaction by platforms should be examined no matter how small”.