Australia | Jun 02 2009
By Chris Shaw
Economic recessions change assets from weak hands to strong hands, providing opportunities galore to the latter. M2 Telecommunications Group ((MTU)) appears to have grabbed one such opportunity by buying the small and medium-sized business assets of Commander Communications, once upon a time a stock market darling but nowadays in receivership.
The deal is expected to add more than $100 million annually M2’s group revenues, lifting them to more than $360 million. The acquisition is costing the company just $19 million with M2 management indicating the deal should boost earnings per share by in excess of 50% in FY10. That is not a typo: fifty percent it is.
The transaction should help the company consolidate its position as the largest network independent telecommunications provider in Australia, the company offering fixed line, mobile and data services in this country and fixed line and 3G services in New Zealand.
Along with the earnings growth already expected from the acquisition, there is scope for additional growth from the deal via an expansion of the products and services offered under the Commander name and via improvements to its sales and service network.
No brokers in the FNArena database currently cover M2 given its market capitalisation prior to the deal was only around the $60 million mark, but one would assume the announced deal will lead to increased attention from investors, as it not only increases the size of M2, but also considering the projected earnings growth by management.
M2 was already on the radar of various smaller stockbrokerages and equity researchers in Australia.
In the 2008 financial year the company generated earnings per share (EPS) of 6.7c and paid 5c in dividends. M2’s 1H09 EPS of 4c compared to 3c in the previous corresponding period. Based on FY08 numbers, in combination with management’s guidance, the Commander deal suggests EPS of at least 10c in FY10, implying the stock is at present trading on a P/E (price to earnings) ratio of less than 9x – ex the positive impact from the deal.
The market clearly likes the deal as shares in M2 today are stronger, with the stock up 15c or 26% at $0.72 as at 2.00pm. This compares to a trading range over the past year of $0.42 to $0.72.
