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Why AGL's $3bn Vocus bid makes sense for one side, not the other

Glenn Freeman  |  12 Jun 2019Text size  Decrease  Increase  |  
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AGL Energy's (ASX: AGL) $3 billion tilt at Vocus (ASX: VOC) is a questionable move, but one which holds potential upside for shareholders of the corporate telco, say Morningstar analysts.

The energy company lobbed the bid for the internet provider on Tuesday, which saw a sharp fall in AGL's shares as investors questioned why Australia's top power producer is interested in buying a struggling telco focused on corporate and government customers with a fibre-optic network.

AGL chief executive Brett Redman said he saw an opportunity for the acquisition to open up products blending energy and data – while conceding there may be parts of the business "not mission critical" to that objective.

"At this point we haven't said that there's anything that we would expect to exit," Redman told reporters on the sidelines of an energy conference in Melbourne.

He also emphasised AGL had no plans to break up Vocus, instead aiming to grow the combined businesses.

Morningstar senior equity analyst Brian Han lifted his fair value estimate for Vocus by 32 per cent to $3.95 on news of the proposed acquisition.

He sees the likelihood of the deal proceeding as a 50/50 proposition. Based on his view of a 50 per cent probability of it not completing, Han says his stock price fair value would revert to $3 a share.

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"Vocus' data room is fast becoming a Kinder Surprise 'fun house,' given that it has been visited by three private equity suitors who have all walked away with their assessments of the narrow moat-rated group's intrinsic value tied in knots," Han says.

"Nevertheless, AGL's due diligence could yield a different outcome, as it is likely to have a longer investment horizon," he says.

Shares in Vocus were trading at $4.28 at market close on Wednesday, just above Morningstar's fair value estimate.

A waste of firepower

Morningstar utilities analyst Adrian Atkins questions AGL's wisdom in making the approach.

"While it makes sense for narrow-moat-rated AGL Energy to diversify away from electricity generation and retailing, where it is under constant government attack, we doubt using all its firepower buying underperforming telecommunications roll-up Vocus Group is a good idea.

"AGL made an indicative, non-binding $4.85 a share takeover proposal and will spend the next month conducting exclusive due diligence before deciding whether to commit," Atkins says.

He sees the large scale of Vocus as the main problem with the acquisition: "This will potentially leave AGL too highly geared to pursue other, more attractive opportunities."

Atkins notes that if the deal was funded without raising equity – a scenario he thinks likely – AGL's debt-to-earnings before interest, tax, depreciation and amortisation would rise to an "aggressive" 2.5-times, from 1.1.

He believes AGL is under pressure from investment bankers to make an acquisition, and repeats his preference for a wait-and-see approach.

"We’d rather the firm hold on to its pristine balance sheet, focus on investing in its own business and paying attractive dividends while waiting for more compelling acquisition or development opportunities," Atkins says.

He has left AGL's fair value unchanged at $21 a share, a slight premium to the energy company's Wednesday closing price of $19.58.

is senior editor for Morningstar Australia

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