New Zealand telecommunications carrier TeamTalk has urged its shareholders to reject the "predatory" and "exploitative" takeover by mobile carrier Spark, obtaining an independent assessment to demonstrate that the acquisition undervalues the company's value to the tune of around NZ$22.8 million to NZ$39.6 million.
"Your directors recommend that you reject the Spark offer," TeamTalk headed its latest missive to shareholders.
"The independent adviser's value range for TeamTalk's three businesses is NZ$85 million to NZ$103.2 million. Deducting a value for corporate costs (of NZ$6.3 million to NZ$7.7 million) implies a combined enterprise value of NZ$78.7 million to NZ$95.5 million. The Spark offer implies an enterprise value of NZ$55.9 million.
"Therefore, the Spark offer is NZ$22.8 million to NZ$39.6 million lower than the independent adviser's assessment of the enterprise value of TeamTalk."
TeamTalk CEO Andrew Miller called the offer "predatory", with chair Roger Sowry adding that the company never encouraged or solicited Spark's offer.
"From the outset, we saw Spark's offer as a hostile and opportunistic attempt to exploit a low point in TeamTalk's recent trading history and before TeamTalk's shareholders benefited from the turnaround strategy under way," Sowry said.
"The Grant Samuel report validates our earlier assessment that Spark's offer is woefully inadequate."
TeamTalk's directors said the acquisition offer takes advantage of the company's current value -- which is at its lowest point to date.
"The offer fails to reflect the standalone value to TeamTalk's new strategy, strong leadership, and forecast growth," TeamTalk said in a statement to the Australian Securities Exchange (ASX) on Thursday morning.
"The offer price of NZ$0.80 per TeamTalk share fails to value TeamTalk's three businesses appropriately as separate components ... there are synergies and strategic benefits over and above the fair value of TeamTalk than an acquirer such as Spark would capture through integrating CityLink, TeamTalk Mobile Radio, and Farmside. Given the strategic nature of these businesses, TeamTalk shareholders should be compensated for a significant proportion of these benefits."
According to TeamTalk, its current business plan, which is being led by a new CEO, CFO, and transformation officer, will lead to "strong profitable growth".
Spark CFO David Chalmers responded to TeamTalk's claims by saying the independent adviser's valuation of the company "lacks real-world credibility" and that its new leadership is mostly made up of those who were responsible for the company's current predicament.
"The top end of the range represents a premium to the last trading price before the Spark notice of intention of 369 percent, which is patently absurd," Chalmers said.
"This report asks shareholders to have enormous faith that the TeamTalk board, many of whom are the same team which has led TeamTalk into what Grant Samuel refers to as the 'ill-fated' acquisition of Farmside, and more recent 'disarray', will deliver the huge improvement relied on in the valuation."
TeamTalk provides digital mobile radio services, as well as metro fibre services under its brand CityLink, and rural internet services under its brand Farmside.
Under Farmside, TeamTalk is one of the largest resellers of the New Zealand government's Rural Broadband Initiative (RBI), and uses satellite, ADSL, and wireless technology to provide internet connectivity in regional areas. It also has a contact centre in Timaru with over 70 staff members.
Spark in February announced that it intended to fully acquire TeamTalk in an effort to expand its provision of internet services across the country, launching its formal takeover offer two weeks ago and saying it would be in the "best interest of TeamTalk shareholders".
If the acquisition proceeds, TeamTalk's CityLink brand would provide Spark with a free Wi-Fi service throughout Wellington, as well as fibre, dark fibre, and custom networks within six cities across the country.
For the first half of FY17, TeamTalk reported a net debt of NZ$33.89 million, down from NZ$35.47 million, with broadband revenue increasing by 7 percent to NZ$7.38 million and mobile radio revenue increasing by 4 percent to NZ$10.2 million.
Net cash flow from operations increased by 27.6 percent to NZ$5.36 million as of December 31, with TeamTalk also announcing a three-year deal with Westpac New Zealand on February 28.
TeamTalk updated its net debt to be NZ$33.2 million as of the end of last month, with the company adding that it is considering a resumption of dividends during calendar 2018.
Capital expenditure spend will continue, TeamTalk notified shareholders, until FY20 as it digitises its national mobile radio network and expands its fibre network throughout Wellington.
While this "substantial" capex spend will affect the company's bottom line out to 2021, TeamTalk argued that it will improve its market position -- another thing that Spark is attempting to take advantage of in its offer.
"Building fibre broadband networks in the CBD areas of large cities is highly challenging, costly, and comes with significant risk. Further, civil works in these areas would require council consents, which may only be provided with conditions attached," TeamTalk pointed out on Thursday.
"Spark itself has spoken to the significant challenges when its representatives recently stated that 'The TeamTalk acquisition is preferable to alternative strategies to build new networks in Auckland and Wellington'."
TeamTalk pointed towards its 270km fibre network throughout streets and 70km fibre network in buildings across Auckland and Wellington; its 450 high sites and spectrum for its mobile radio networks, which holds more than 90 percent of the trunked radio market; and Farmside's footprint in the rural market as high-value assets that will continue bringing in revenue.
Further, TeamTalk criticised Spark's own business, saying the telecommunications operator has "strategic challenges and its earnings are forecast to be flat between 2017 and 2018".
Spark last month reported first-half earnings before interest, tax, depreciation, and amortisation (EBITDA) of NZ$471 million, up 3.5 percent year on year, on revenue of NZ$1.79 billion, up 4.1 percent.
Earnings after tax amounted to NZ$178 million, up 12.7 percent, with Spark chair Mark Verbiest saying the results matched Spark's long-term strategy despite the "challenging market and operating environment".
Spark is pushing further into the fibre broadband market through its street-in-a-week program, which is designed to shift users off the legacy copper network onto the New Zealand government's Ultra-Fast Broadband (UFB). The telco partnered with Chorus in November on a week-long trial of the fibre installation program in Whakatane and partnered with LFC Enable last month in Christchurch, and launched 1Gbps broadband speeds across the UFB in December.
Spark has said its revenue will grow if it acquires TeamTalk.
"TeamTalk is a small operator in the New Zealand telco market. Its financial performance has declined over the last few years, with a number of profit downgrades, and it faces significant re-investment requirements across its businesses," Spark's Simon Moutter said in February.
"Given TeamTalk's debt position (last reported bank debt was NZ$33.6 million with a maturity date of September 2017), and small market capitalisation (approximately NZ$12.8 million), its ability to fund this investment is constrained. This has been reflected in TeamTalk's decision not to pay a final dividend to shareholders in FY16."