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Merger and Acquisition activity in the ASX Telecommunications Sector seems to be getting hotter and more interesting every day.  Some recent events sound like they came from the pages of a novel about the intrigues of the corporate world.  

First there was the news Vocus Communications (VOC), had acquired a 10% stake in Amcom Telecommunications (AMM) back in October 2014.  In December another announcement revealed Vocus Communications’ intent to acquire the remaining 90%. The resultant company would have a market cap over $1 billion and could pose a threat to TPG Telecommunications (TPG) push for greater market share, particularly in the corporate market.  The match between Vocus and Amcom appeared as one made in heaven as a perfect marriage between the West Coast based fibre optic network of Vocus and the East Coast based Amcom, both serving corporate and government customers.  

By the end of October TPG began quietly began buying Amcom stock with an apparent eye toward stopping the deal.  However, TPG management claimed it “currently had no specific intention regarding Amcom other than to own shares as a strategic investment’. By 30 April 2015 TPG redefined “currently”, announcing to the market it now held 18.6% of Amcom shares and intended to vote against the proposed merger.  In response, management at Vocus announced plans to take the matter to the ACCC (Australian Competition and Consumer Commission).

TPG CEO David Teoh has long dreamed of actually challenging Telstra’s market dominance and is now poised to move into the number three spot behind Telstra and Optus, owned by Singapore Telephone (SGT).  To grab that spot TPG announced a bid to take over iiNet Limited (IIN) at a cost of $1.4 billion on 16 March.  In a scene worthy of a movie script, the founder and former CEO of iiNet, Michael Malone, got on an investor conference call meant to smooth the ruffled feathers of IIN shareholders and slammed the deal.   Credit Suisse had already gone on record, hailing the takeover offer as a “bargain.” The Malone pronouncement happened on 23 March and as if on cue, rival M2 Group Limited (MTU) confirmed the rumours it had stepped up with a $1.6 billion bid on 27 April.  The latest scene in the battle comes from iiNet management, informing TPG it has till 5 May to counter the offer.

What’s driving this high-stakes poker game may be the belief that in a post NBN (National Broadband Network) world the competitive advantage will fall to the very large players.  In reality, the five companies involved in the current dance have all been remarkably successful.  The following table shows the average annual rate of shareholder return of each company as well as some forward looking numbers.

Company

(CODE)

Share Price

52 Week % Change

3 Year

Total Shareholder Return

5 Year

 Total Shareholder Return

10 Year

 Total Shareholder Return

2 Year

Earnings Growth Forecast

TPG Telecom Ltd

(TPM)

$8.94

+51%

+73%

+34.7%

+23.1%

+25.1%

M2 Group Ltd

(MTU)

$10.98

+99%

+58%

+51.1%

+47%

+7.7%

iiNet Ltd

(IIN)

$9.94

+42%

+51.6%

+34.2%

+18%

+9.6%

Vocus Communications

(VOC)

$5.81

+28%

+47.2%

+60.6%

+30.5%

+83%

Amcom Telecom

(AMM)

$2.30

+14%

+32.3%

+31.7%

+24.8%

+16%

 

The fibre optic world of broadband is the latest development in the long term trend of digital communication networks.  Consumers and corporations alike are linked together in ways deemed the stuff of science fiction less than a century ago.  History tells us new “links”, be they communication links or transportation links, spur developments beyond our wildest dreams.  It is hard to fathom that smartphones that now serve the needs and wants of both corporations and consumers were introduced less than a decade ago.  At the time not everyone realised the revolution on the horizon was not about the phones, but about the applications that could take advantage of this new communications link.  

In truth, the ease and speed of connectivity we are now seeing is opening doors everywhere.  As an example, consider the success of My NetFone (MNF) with a market cap of only $237 million.  This company is a leader of Voice over Internet Protocol (VOIP), which is tech talk for using your computer as a telephone.  The company began trading on the ASX in 2006 with an issue price of $0.20.  Let’s look at a price movement chart comparing this small company to the leading player in the current Telco M & A wars – TPG Telecom Limited.  

MNF supports the notion that with sound business model smaller companies can prosper.  Over three years this company has rewarded its shareholders with average annual rate of total return of an astonishing 109.4%; and 122.2% over five years.  MNF has made key acquisitions; perhaps the most important being the Symbio Group, which operates the VOIP network serving wholesale business customers with a full range of telecommunications services, including cloud-based PBX (Private Branch Exchange), and cloud based Fax.  The company started with a base of residential customers, expanding later to SME’s (Small to Medium Enterprises) and finally to larger corporations and government entities.  Last year Business Review Weekly named My NetFone the fastest growing Telco on the ASX.  

Another relative newcomer to the ASX Telco Sector that supports the notion that success does not always depend on size is BigAir Group Limited (BGL), with a market cap of only $134 million.  Like MNF, BigAir debuted on the ASX in 2006 at a price of $0.25.  The company operates a Fixed Wireless Ethernet broadband network, targeting businesses largely in major cities.  Rather than transmitting via fibre optic or copper cable the BigAir signal uses radio microwaves to connect fixed locations.  The company has added university campuses to its customer base as well as a recent foray into retirement living centres.  BigAir is considering expanding its Wi-Fi offerings to shopping centres.

BigAir management claims the NBN rollout will actually benefit them by increasing demand for high speed broadband.  BigAir’s network already delivers speeds promised by the NBN and as yet has no residential customers.  The following table shows a comparison between BigAir and My NetFone.

Company

(CODE)

Share Price

52 Week % Change

3 Year

Total Shareholder Return

5 Year

 Total Shareholder Return

2 Year

Earnings Growth Forecast

My NetFone Ltd

(MNF)

$3.79

+80%

+109.4%

+122.2%

+26.4%

BigAir Group Ltd

(BGL)

$0.77

-14%

+36.3%

+35.4%

+30.6%

 

Clearly MNF has outperformed BGL historically but note the 2 year earnings growth forecast, where BGL is expected to do slightly better.

Finally we have two niche players which some may claim are suitable only for punters.  Both came on to the ASX in 2014 and have yet to deliver Full Year Financials.

The first is Speedcast International Ltd (SDA).  Founded in 1999 this company now offers satellite-based communication networks and services, with industrial sector customers in more than 60 countries.  Speedcast serves business enterprises in the Oil & Gas, Mining, and Maritime Sectors as well as government and NGO’s (Non-Government Organisations.) The common denominator in all its customers is remote locations with no access to other means of connectivity.  

The shares began trading on 12 August 2014 with a first day closing price of $2.05 and now trades at around $2.68.  Speedcast has a long and impressive history of accomplishments and as yet appears relatively unknown to ASX investors.  The three month average daily trading volume is about 63 thousand shares, which is dwarfed by the average volume of BigAir at 421 thousand and to a lesser extent by My NetFone which averages 151 thousand shares traded per day.  Considering the demand for more connectivity and more speed regardless of location, this company bears watching.

Finally, we have Ziptel Ltd (ZIP), a company serving consumers exclusively with attractively priced calling and messaging options.  ZIP went public in July 2014 as the result of a reverse takeover from a dormant clothing company, Skywards Limited, “acquiring” the assets of AussieSim Pty Ltd.  

AussieSim launched its first products in 2013, serving the needs of travelers wishing to use their own phones.  The company’s unique “OneSim” product is a universal sim card allowing Australians to use their own phones anywhere in the world.  Revenue streams include direct online sales, sales through distribution partners, and royalties from AussieSim products sold under different brand names.

The share price of the newly named Ziptel Ltd closed its first day of trading at $.20 and more than doubled on 24 October when the company announced a distribution agreement for its newest offering, an application called ZipT.  However, the share price cratered in November when ZIP announced a capital raise to complete the development of the app!  Here is a price movement chart for Zip since it came to the ASX.

Pattersons Securities has a research note up on the ZIP website stating the potential of the ZipT app is “blue sky.”  The ZipT app will be free to download on any mobile device, Android, IOS, or Windows. Calls and SMS (Short Message Service, or text messages) from users with the app to other users with the app will be free.  Perhaps the most revolutionary feature of the app is its ability to work in low bandwidth, making this app highly desirable for those still in a 2G environment.  The company plans to sell credits to users who wish to use the app to call landlines or users without the app.

In January ZIP reported an “explosion of global web traffic” to its ZipT website following a social media campaign marketing the app.  Despite its promise this is still a high risk speculative investment as the app may not perform as well as expected, despite successful Beta testing.

However, Patersons reports 50,000 users registered in a pre-launch VIP offering and estimates the potential market in areas with 2G service at c1 Billion.  Our other punters’ special, Speedcast International, has signed a memorandum of agreement to release the app to its satellite customers under the brand SpeedTalk.  

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