On June 7th 2017, Vocus Group Limited (ASX code: VOC) received an unsolicited proposal
from Kohlberg Kravis Roberts & Co. (KKR) to acquire all of the issued capital in Vocus Group
Limited for a cash offer price of $3.50 per share. On the day prior to the receipt of the merger
proposal, the closing price of Vocus Group Limited shares was $2.86. The proposed acquisition
is to be completed using a scheme of arrangement bid process if it is supported by the Board
of Directors of Vocus Group Limited. The Board of Directors formed an Independent Board
Committee (IBC), which held an initial meeting on the evening of June 7th 2017 to assess the
acquisition approach from KKR and to determine a response strategy for the wider Board of
Directors and communication to the company’s shareholders regarding the proposal. The
indicative timetable was for the company to announce its response to the acquisition proposal
from KKR to the market by August 21st 2017.
Vocus Group Limited is an ASX-listed, vertically integrated telecommunications provider
which operates in the Australian and New Zealand telecommunications markets. The company
owns a national fibre infrastructure network connecting all capital cities and most regional
cities across Australia and New Zealand, with its fibre communications network directly
connecting to more than 5,500 buildings. Vocus Group Limited provides a portfolio of
communications brands and products for corporate, small business, government and residential
customers across Australia and New Zealand. The company also provides international internet
protocol (IP) transit services, including submarine cable capacity connecting Australia to
Singapore, New Zealand and the United States. It also operates data centres supporting the
provision of its communication services.
Kohlberg Kravis Roberts & Co. is a well-known unlisted private equity business which is based
in the United States, but has undertaken various acquisition transactions and other investments
involving listed and unlisted businesses in Australia. The company raises funds by issuing
debentures and similar debt securities, and uses the proceeds raised for investment purposes,
taking either minority or majority ownership stakes in businesses. The company then actively
engages in the management and restructuring of businesses in which it invests and crystallises
any value creation using investment exit strategies such as trade sales and sharemarket listings.
The following table provides a summary of financial, structural and performance information
for Vocus Group Limited for the June 30th financial year ends from 2013 to 2017 (All figures,
except for per share, issued capital and percentage statistics, are expressed in A$Million):
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2013 2014 2015 2016 2017
Key indicators
No. of issued shares (Mill.) 76.2234 90.8869 101.5036 528.2674 619.9819
Market capitalisation 160.0691 432.622 585.6758 4,500.8382 2,089.3390
Share price ($) 2.100 4.760 5.770 8.520 3.370
Price/Earnings ratio (times) 18.261 32.828 23.648 42.814 -1.452
Market / Book ratio (times) 2.2523 3.1550 2.9845 1.4179 0.9072
Earnings per share ($) 0.1146 0.1500 0.2441 0.1986 -2.3214
Dividends per share ($) 0.0100 0.0180 0.0830 0.1750 0.0600
Dividend payout ratio (%) 8.7260 12.0000 34.0025 88.1168 -2.5846
Trading Information
Operating revenue 66.4998 91.7530 149.0040 829.9380 1,820.5770
Operating expenses 39.8472 59.4120 104.7970 616.0130 2,991.6770
Earnings before interest,
taxes, depreciation and
amortisation (EBITDA)
22.2200 33.0730 57.1700 234.8980 -1,170.9710
Earnings before interest and
taxes (EBIT)
13.3545 21.3610 38.4860 156.4110 -1,364.5360
Profit before tax 12.3195 19.5400 33.2080 132.8260 -1,405.4410
Net profit after tax before
abnormals
8.7375 13.6290 24.7730 104.9120 -1,439.2020
Net profit after tax after
abnormals
5.0983 12.9250 19.8500 64.2520 -1,464.8700
Net interest expense 1.0350 1.8210 5.2780 23.5850 40.9050
Income tax expense 3.5820 5.9110 8.4350 27.9140 33.7610
Net operating cash flows 16.6902 24.1700 34.6940 98.0680 219.0720
Return on total assets (%) 5.2101 6.4342 6.4623 2.2350 34.5000
Return on equity (%) 12.2944 9.9392 12.6239 3.3051 62.8912
Structural information
Cash and cash equivalents 14.1691 44.5570 15.1700 128.6290 50.1940
Current assets 25.4160 56.0680 41.9300 333.6840 327.4850
Property, plant & equipment 50.7770 63.3840 204.6190 522.4130 1,542.9790
Total assets 167.7028 211.8220 383.3440 4,694.0190 4,171.5960
Current liabilities 36.2137 26.3310 40.8780 400.5640 396.7500
Long-term debt 56.9864 41.9310 117.9590 872.3820 1,065.8160
Total liabilities 96.6339 74.6980 187.1050 1,519.7340 1,868.4720
Share capital 46.0687 98.5940 144.2440 3,100.7380 3,774.8340
Retained earnings 24.0954 35.8910 48.1480 57.0800 -1,494.4130
Total shareholders’ equity 71.0689 137.1240 196.2390 3,174.2850 2,303.1240
Long-term debt to Total
assets (%)
33.9806 19.7954 30.7710 18.5850 25.5494
Total liabilities to
shareholders’ equity (%)
135.9721 54.4748 95.3455 47.8764 81.1277
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Other relevant information relating to Vocus Group Limited or the wider corporate and
sharemarket sectors is:
• The beta coefficient for Vocus Group Limited is 0.61, compared to the average beta
coefficient for the telecommunications industry of 0.75.
• The 10-year Australian Government Bond yield was 2.675% on June 30th 2017.
• The S&P/ASX 200 Accumulation Index has provided an average annual return of 9.976%
over the most recent 8-year period.
• Consensus analyst forecasts for EBITDA and earnings per share (EPS) for the 2018
financial year are $300 million and $0.250 per share, respectively.
• Long-term earnings (including residual earnings) and dividend growth forecasts for Vocus
Group Limited are 4.00% and 5.00%, respectively.
• The issued share capital for Vocus Group Limited at the end of 2018 financial year is
expected to be 670 million shares.
• Assume that the analysis is being undertaken on June 30th 2017.
The following table provides information on Australian listed peer companies operating in the
same industry as Vocus Group Limited as at June 30th 2017 (figures are in A$Million unless
otherwise stated):
MNF Group
Spark New
Zealand
Telstra
Corporation
TPG
Telecom
Market capitalisation 318.0412 6,684.2827 51,141.1810 4,836.2967
No. of issued shares (Mill.) 72.7783 1,856.7452 11,893.2979 848.4731
Share price ($) 4.3700 3.6000 4.3000 5.7000
Book value of Equity 68.3470 1,572.3810 14,808.000 590.7770
Enterprise value 276.8730 7,488.7131 67,487.1807 12,224.2101
EBITDA 22.5310 969.5238 11,029.9000 791.0000
Net profit after tax 12.5640 219.2467 4,224.900 326.6000
Sales revenue 191.752 3,500.1174 25,912.0000 2,387.8000
In relation to recent acquisition activity in the telecommunications sector in Australia, the
following table provides deal multiples information for target companies from the
telecommunications sector involved in acquisitions in the last 7 years:
Date
announced Target company
Offer price /
Book value
Offer price /
EPS
Bid Premium
Offered
22/11/10 Clever Communication Australia
Limited
1.570 10.187 28.574%
12/07/13 Inabox Group Limited 2.632 13.866 15.550%
28/09/15 M2 Group Limited 2.280 26.014 28.651%
13/09/16 BigAir Group Limited 1.910 20.923 29.787%
As the lead financial advisor to Vocus Group Limited on the acquisition proposal from KKR,
the Independent Board Committee has requested your firm to prepare an independent expert’s
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report to assist them in forming a response and recommendation for shareholders relating to
the proposal. This expert’s report should include the following content:
• The results and conclusions from a financial analysis of Vocus Group Limited, with
particular focus on operating, efficiency and performance aspects of the business and, from
this, identification of potential sources of value creation from acquiring Vocus Group
Limited.
• An estimate of the current intrinsic (fundamental) market value of Vocus Group Limited’s
equity shares. This valuation estimate should be determined from using a number of
valuation metrics and approaches, and can either be presented as a point or range estimate.
• Based on the above analysis and any other relevant information or considerations, the
provision of a recommendation as to whether the price offered in the acquisition proposal
is fair and reasonable or otherwise.
Required:
This independent expert’s report is due to be submitted to the Independent Board
Committee (IBC) of Vocus Group Limited by 6.00pm on Tuesday 3rd October 2017, via
the FIN3CSF subject LMS site. This case study contributes 15% to the overall final
assessment in the FIN3CSF subject. This case study is to be completely individually, and
the maximum word limit, excluding calculations and financial analysis reporting (such as
tables), is 1,000 words
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