Australian telecom groups M2, Vocus to merge in A$3-bn deal

Australia's fourth-largest DSL broadband service provider M2 Group Ltd has agreed to merge with rival Vocus communications Ltd in an all-share deal valued over A$3 billion ($2.1 billion) to take on bigger rivals Telstra, TPG Telecom and SingTel Optus.

The merged entity will become the fourth-largest integrated telco in Australia and the third-largest in New Zealand, and will offer a diverse range of products and services including retail internet, retail electricity and gas, corporate and wholesale  internet and IP voice, data centre and cloud services, dark fibre, etc.

The move follows M2's failed attempt to acquire the country's third-biggest DSL internet service provider iiNet Ltd which was eventually bought by TPG Telecom to create Australia's no.2 broadband provider after Telstra. (See: Australian regulator clears TPG's $1.2-bn iiNet acquisition).

The merger, which has been unanimously recommended by the boards of M2 and Vocus, is subject to customary conditions including shareholder approval and regulatory scrutiny. The transaction is expected to close early next year.

While giving its nod to the TPG-iiNet merger last month, the Australian Competition and Consumer Commission (ACCC) had warned that any future consolidation among major players in the broadband market would face very close scrutiny.

''The ACCC has noted the growing consolidation in what will now become a relatively concentrated broadband market. Any future merger between two of the remaining four large suppliers of fixed broadband is likely to raise serious competition concerns,'' ACCC chairman Rod Sims had said.

Under the agreed terms, M2 shareholders will receive 1.625 Vocus shares for each M2 share.

Vocus chairman David Spence said, ''The merger of Vocus and M2 is a compelling opportunity for all shareholders. The businesses combine Vocus' telecommunications infrastructure and corporate customer base with M2's demonstrated expertise in the consumer and SME segments.''

According to Craig Farrow, chairman of M2, the companies are an excellent fit, being highly complementary and culturally aligned. Both have successful track records of creating substantial value for shareholders and, together, we will retain this focus.

''Our ability as a merged company to capture future growth opportunities in Australia and New Zealand will be significantly enhanced,'' he added.

Both Vocus founder and CEO James Spenceley and M2 founder Vaughan Bowen will become executive directors of the merged entity, while M2 CEO Geoff Horth lead the combined business.

The merged company will have revenue of around $1.8 billion and earnings before interest, tax, depreciation and ammortisation of $370 million in fiscal year 2016.

Expected cost synergies are approximately $40 million per annum, by the end of fiscal year 2018.

Sydney-based Vocus is a leading provider of data centre, dark fibre and internet across Australia, New Zealand and the US. It owns over 1,600km of metro fibre in Australia and 4,300km of intercity fibre in New Zealand.

The company has a track record of healthy acquisitions with the recent ones include the data centre business of Enterprise Data Corp and Amcom Telecommunications in 2015.

Melbourne-based M2 is a fast-growing provider of a range of communication, utility and insurance services in Australia and New Zealand. Its business segments in Australia include Commander and Engine brands while consumer brands include Dodo and iPrimus. In New Zealand the company offers the leading brands of CallPlus, Slingshot, Orcon, 2Talk etc.

Further to the news, shares in M2 surged 13.5 per cent to $9.56 today in Sydney while Vocus shares plunged around 7 per cent to $6.03.