Vocus Communications and M2 Group have announced their intentions to merge and form the fourth-largest telecommunications provider in Australia, and the third-largest in New Zealand, with the companies claiming that the combined entity will be worth more than AU$3 billion.
The companies' Merger Implementation Agreement has gained the support of both boards, with the companies forecasting combined revenues of AU$1.8 billion for FY16, as well as earnings before interest, tax, depreciation, and amortisation (EBITDA) of AU$370 million.
Occurring via an M2 scheme of arrangement, the merger would be scrip based, wherein M2 shareholders will be given 1.625 Vocus shares per M2 share.
M2 chief executive Geoff Horth will be appointed CEO of the combined entity, while founder and CEO of Vocus, James Spencely, will take the role of executive director.
"The merger of Vocus and M2 is a compelling opportunity for all shareholders," said David Spence, chairman of Vocus, in a statement.
"The businesses combine Vocus' telecommunications infrastructure and corporate customer base with M2's demonstrated expertise in the consumer and SME segments. The merger creates the 4th-largest vertically integrated telecommunications company in Australia, and the 3rd largest in New Zealand."
M2 shareholders have yet to approve the deal, with a vote set to take place in early 2016. The Australian Competition and Consumer Commission (ACCC) would thereafter also have to approve the deal before the scheme can take place.
According to the companies, M2 and Vocus will fit together well, as they have similar values and objectives.
"M2 and Vocus are an excellent fit, being highly complementary and culturally aligned," said Craig Farrow, chairman of M2.
"Both have successful track records of creating substantial value for shareholders and, together, we will retain this focus. Our ability as a merged company to capture future growth opportunities in Australia and New Zealand will be significantly enhanced."
The combined entity would provide retail internet, retail electricity and gas, corporate and wholesale internet and VoIP, datacentre and cloud services, domestic and international bandwidth, and dark fibre.
M2, which operates telco providers Dodo, iPrimus, and Commander, as well as energy provider Engin, in February recorded an 8 percent rise in revenue for the six months to December 2014 to AU$546.2 million, EBITDA up 14 percent to AU$86.1 million, and net profit after tax up 25 percent, to AU$38.5 million.
"Organic growth has been the sole contributor to revenue growth in the half," M2 told investors in a statement [PDF] at the time. "Profit has increased as a product of this organic growth, as well as synergies enacted in the previous fiscal year, and a dedicated program of internal improvement."
Vocus in August announced a full-year FY15 revenue increase of 62 percent to AU$149.8 million, EBITDA up 56 percent to AU$51.6 million, and a net profit after tax up 34 percent, to AU$18.1 million.
M2 had previously attempted to acquire rival telco iiNet, in April launching a predominately scrip AU$2.25 billion counter-bid and eclipsing TPG's initial all-cash offer of AU$1.4 billion in March. M2's offer was backed by iiNet, and would have seen 0.803 M2 shares swapped for each iiNet share, plus a AU$0.75 special dividend.
This resulted in TPG upping its offer the following month to a deal worth around AU$1.5 billion wherein TPG would pay AU$9.55 per iiNet share, incorporating a AU$8.80 cash or scrip consideration and AU$0.75 cash per share.
"The board has weighed up both offers, and given careful consideration to the merits of a primarily cash-based offer to one which predominantly comprised scrip. We believe the revised cash offer of AU$9.55 from TPG is favourable to M2's predominantly scrip offer," iiNet chairman Michael Smith said in a statement in May.
"While the ACCC was concerned that the acquisition of iiNet by TPG may lessen competition in the retail fixed broadband market, particularly in the short term, the ACCC concluded that this would not reach the threshold of a 'substantial' lessening of competition as required under section 50 of the Competition and Consumer Act," ACCC chairman Rod Sims said.
The consumer watchdog found that due to the continuing high level of competition within the fixed-line market from Telstra, Optus, and M2, the TPG-iiNet merger would not limit this -- as long as no other acquisitions are permitted in the future between these four companies.
"The ACCC has noted the growing consolidation in what will now become a relatively concentrated broadband market. Any future merger between two of the remaining four large suppliers of fixed broadband is likely to raise serious competition concerns," Sims said.