Treasure Chest: Has Amcom Killed Off A Vocus Merger?

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By Greg Peel

Amcom Telecommunications ((AMM)) operates telco, cloud, and IT services and data and network solutions including fibre optic point-to-point connectivity. Amcom is headquartered in Perth and to date management has established a track record of delivering high returns on a predominantly West Coast fibre network.

Amcom shares enjoyed a strong re-rating from early 2012 as the market began to become interested in anything to do with fibre, “the cloud” or data centres in the twenty-first century world of internet-based services. But having priced in potential, the market had gone quiet on the stock in 2014 ahead of any new growth drivers. Amcom raised fresh capital in June, but posted a rather subdued, albeit not unexpected, FY14 result in August. At the time, brokers looked forward to whatever acquisition Amcom had in mind for its new capital. The shares were nevertheless sold off with the rest of the market in the September-October correction.

Vocus Communications ((VOC)) offers telco, data centre and high bandwith connectivity solutions to ISPs and telco markets in Australia and New Zealand and connects to the global internet backbone in the US. Vocus is headquartered in Sydney. Late last month Vocus acquired 10% of Amcom and approached the company with a merger proposal.

The news sparked sharp rallies in the share prices of both companies. For analysts it would be an obvious marriage of like-minded companies, merging not only businesses but also West Coast and East Coast penetration. But analysts believe Vocus is not the only company which would benefit from a tie-up with Amcom. In particular, CIMB has offered up TPG Telecommunications ((TPM)) as another obvious candidate, along with iiNet ((IIN)) and possibly NextGen (not listed).

In other words, Amcom is “in play”, at least from a possible merger if not full takeover perspective. But while talks with Vocus are ongoing, Amcom has continued to pursue its own agenda. The company had flagged recently that it might acquire an East Coast-based Cisco reseller to fast track growth on its telephony platform, but yesterday management came out with news of another, completely different deal.

Amcom has acquired 180km of fibre assets in Sydney, Melbourne and Brisbane from Megaport for $15m. This will form the backbone of Amcom’s East Coast fibre network, delivering accessibility to 17,000 buildings in the three CBDs. The network connects 30 data centres, with an additional 18 to be added and around 30 NBN Points of Interconnect (POI). The company has also signed a 15-year strategic fibre access agreement with infrastructure owner FirstPath, a Sydney based wholesale-only carrier which is building a fibre network in Australia. The Firstpath network will add over 200 buildings to Amcom's East Coast market via 50km of fibre.

And finally, the company will rollout Ethernet in the First Mile (EFM) infrastructure in the east coast capitals, with customer connections to commence from the March quarter next year. 

Macquarie believes this alternate acquisition makes more strategic sense, building upon Amcom’s West Coast assets. On-net customer migration is also an attractive proposition that will create synergies post acquisition. CIMB sees this development as a positive use of the $40m cash that was raised in June, significantly expanding Amcom’s market reach as a proven provider of fibre access. Although this does overshadow the company’s lack of success from hosted voice service, which CIMB believes is key to FY15 targets, this is less of a valuation issue than expanding the reach of high-margin fibre access, the broker suggests.

The market also liked the announcement, pushing Amcom shares higher still. But the question now becomes one of what of the Vocus merger? Given this new deal, is it off?

Macquarie suggests there is some asset and synergy overlap between tie-ups with Megaport and Vocus. However, Megaport’s assets and operations are still highly complementary to both Amcom and Vocus. This would suggest Macquarie does not see the Megaport deal as killing off a Vocus merger, and management discussions are still preliminary at this stage.

CIMB believes this deal changes the balance of Amcom’s bargaining power in negotiations with Vocus. On balance, the broker still views the merger positively, but notes the new deal announcement raises Amcom’s valuation in such a merger.

Macquarie believes Amcom is an attractive business with a strong medium term growth outlook. But the shares are now carrying a merger premium (be it with Vocus or someone else) thus at an FY15 PE of 23.4x, the broker sees the stock as well-priced, hence a Neutral rating. CIMB and Citi both carry Buy-equivalent ratings while Credit Suisse is sitting on Underperform but yet to update since the FY14 result release. The brokers’ consensus target price is $2.19, below the current trading price.
 

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