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Vocus agrees to buy FX Networks for $115.8m

Australain company Vocus [ASX:VOC] has bought NZ's FX Networks for $115.8 million.

Vocus will pay $62 million, with up to 33% paid in cash and the balance in new Vocus shares, and assume $53.7 million of debt, the company said in a statement to the ASX. That would see it issue between 8.8 million and 13.1 million Vocus shares at a price of $A4.40 apiece (a 5% discount on its five-day average).

Privately-held FX Networks is the largest fibre optic network operator in NZ, with around 4200km of cable in the ground, providing broadband links to all major centres bar New Plymouth. It sells wholesale capacity to ISPs and other network operators.

An insider broke news of the deal to NBR Monday. Vocus was then put into a trading halt on the ASX.

FX lost around $1 million last year, but Vocus says it expects an immediate turnaround. The business is expected to add $NZ13.5-$14.5m of EBITDA in the first 12 months post acquisition (excluding transaction and integration expenses).

The acquisition is fully funded funded via current cash holdings, a new multicurrency senior debt facility with the Commonwealth Bank of Australia and Vocus scrip issued to FX shareholders, Vocus says.

FX shareholders may accept a combination of shares and/or cash (up to a cap of NZ$20.5m), Vocus says.

The structure of the financing will provide Vocus with an additional unused debt facility of circa A$40m to continue to seek growth opportunities.

Vocus has received agreements from 77.1% of FX shareholders indicating they will accept the offer and the transaction is expected to complete early Q2 FY2015 (that is, before Christmas this calendar year), the company says. The Australian company needs 90% FX Networks shareholder approval for the deal to go though.

Vocus says it will produce an independent expert report on the takeover in late August. A special general meeting will also be held at that time.

The combination of Vocus and FX strengthens both businesses. Vocus will emerge as the third largest network operator in NZ and the clear leader in trans-Tasman telecommunications and data centres, Vocus founder, CEO and majority shareholder James Spenceley says.

A Vocus document filed with the ASX says the transaction would roughly double its revenue to $A136 million, and leave it with total debt of $A86 million.

The seven-year-old company has a market cap of $US374 million. In the six months to December 2013 it made a $A5 million profit on $A44 million revenue. Full-year revenue increased 48% to $A66.5 million.

In March the company issued 11.9 million new shares to raise $A48.7 million. At the time, Vocus said after raising the capital it would "Consider potential acquisitions that would expand or complement its existing product set and network reach."

Ahead of the equity issue, Vocus said it had net debt of $A57.2 million and total debt of $A62.6 million ($A36.4 million in bank debt, and $A26.2 million in vendor financing to Southern Cross Cable as of December 2013).

Vocus shares rose to 10% to $A5.15 per, an all- time high, as the company came off its trading halt. Vocus now has a market capitalisation of $404.7 million.

The stock has surged about 450% this year. The shares are rated a 'buy' based on seven analysts polled by Reuters.


Vocus close buying FX Networks for $100m-plus

LATEST: Vocus in ASX trading halt after NBR report it will buy FX Networks

June 30: FX Networks is up for sale for north of $100 million, and Australia's Vocus Communications [ASX:VOC] is the buyer, a source close to talks between the two companies tells NBR.

NBR understands a deal could be announced as soon as this afternoon. It will be part cash, part shares, the insider says.

Privately-held FX is the largest fibre optical cable network operator outside of Chorus. It builds networks and also manages them on contract to others. 

FX's largest shareholder, with a 33% stake, is its chairman Colin Hill.

Speaking to NBR from the UK this morning, Mr Hill confirmed his company had been in sales talks with local and international companies for about six months.

The chairman said the asking price was more than $100 million.

Mr Hill said FX' annual revenue is around the $50 million mark. It has more than 4200km of fibre in the ground, connecting every main centre bar New Plymouth, and employs 110 staff.

The company has 365 customers including 43 of the Top 100 companies in New Zealand.

He would not comment on its profit/loss situation, but said the company was "going from strength to strength. We've never had it so good."

Asked why he had put FX on the block, Mr Hill said "It's hard to fund a telco out of the private purse." (FX Networks was part of a consortium of companies that missed out on UFB contracts that went to Chorus, Ultrafast Fibre, Enable and NorthPower.)

He added, "I'm 74. I don't want to be working when I'm 80."

Vocus CFO Rick Correll declined to directly address NBR's query about whether his ASX-listed company is in talks with Vocus.

However, he noted that Vocus has said publicly it is open to acquisitions. 

Fast-growing, highly-geared
Vocus operates data centres, and sells wholesale international bandwith on the Sourthern Cross Cable and other networks to ISPs.

The seven-year-old company has a market cap of $US374 million. In the six months to December 2013 it made a $A5 million profit on $A44 million revenue. Full-year revenue increased 48% to $A66.5 million.

In March the company issued 11.9 million new shares to raise $A48.7 million. At the time, Vocus said after raising the capital it would "Consider potential acquisitions that would expand or complement its existing product set and network reach."

Ahead of the equity issue, Vocus said it had net debt of $A57.2 million and total debt of $A62.6 million ($A36.4 million in bank debt, and $A26.2 million in vendor financing to Southern Cross Cable as of December 2013).

In May 2012, Vocus bought Auckland ISP Maxnet for $A6.1 million, refocussing the Auckland company on data centre and network management business as it added bodies. At the opening of an data centre on Auckland's North Shore late last year, Vocus said it would look at managing Australian customers from NZ once a second transtasman cable is laid.

Earlier this month, Vocus announced the acquisition of a 10% interest in the Sea-Me-We 3 undersea cable linking Perth, Australia, with Singapore from Telecom NZ for $US2.3 million.

FX Networks' Mr Hill — last seen on NBR denying he was a tax exile for livinig on the Isle of Man —  says he gained NZ residency around two years ago under the provision for those who invest more than $10 million locally. He is next in NZ in a fortnight.

For his part Vocus CEO and majority shareholder James Spenceley has just made a personal financial foray, buying NBL basketball team the Wollongong Hawks for an undisclosed sum.

ckeall@nbr.co.nz

More by Chris Keall

Comments and questions
2

So not a done deal then.
IIRC FX has lots of tiny shareholders, so getting 90% support could be a challenge. This deal could still flop.
I suspect FX needs Vocus more than Vocus needs FX.
Fun times ahead.

"Commitments received from holders of 77.1% of the shares in FX Networks, with drag rights which ensure at least 90% of shareholders will accept"

Page 10 of the Vocus deck.

http://www.asx.com.au/asxpdf/20140702/pdf/42qlb70ty05g44.pdf