TeamTalk shares jumped two-thirds after the ailing minnow network attracted a $22.7 million takeover from Spark New Zealand, which would bundle fibre in Wellington and a wireless rural internet service provider into the country's biggest telecommunications company.
Auckland-based Spark will pay TeamTalk investors 80 cents per share in a full takeover, a premium to the 45 cents price the stock traded at prior to the announcement. TeamTalk shares climbed 67 per cent to 75 cents, still below the offer price but the highest level since March last year.
James Lindsay, a senior portfolio manager at Nikko Asset Management, said the offer price put an enterprise value of about $56m on TeamTalk, which had about $34m of debt as at June 30, 2016.
"On an earnings basis, it looks relatively cheap at 4.5 times ebitda (earnings before interest, tax, depreciation and amortisation)," Lindsay said. "In the sector they operate in, it's not a bad multiple."
He said the CityLink fibre business appeared to be the cornerstone asset driving the deal, with Spark signalling an intention last year to look at ways to own or get into partnerships for fibre assets as the rising importance of mobile in a 5G environment needs "a lot more fibre backhaul" in the cities.
Spark wants to integrate TeamTalk's services into the larger group, cutting costs by stripping out any duplication and reviewing the business to see what parts of the Wellington-based network can be grown and whether any units should be divested, according to its notice of intention.
"We believe this is a compelling offer, at a significant premium to the current TeamTalk share price, which is unlikely to be achieved by other means," Spark chief executive Simon Moutter said in a statement. "The reality is TeamTalk shares have significantly underperformed relative to the New Zealand market over the last three years, with much lower total returns for investors than the NZX 50 gross return index on a total shareholder return basis."
The looming offer follows TeamTalk's review of operations after the company struggled to integrate the rural ISP Farmside business, acquired in late 2012 for $42m, which left it with higher debt and flat earnings. TeamTalk shares peaked in January 2013 at $3.20 before issues with the purchase started to emerge.
TeamTalk acknowledged the notice and said the board will "meet shortly to consider the takeover notice and draft offer in detail" and recommended shareholders take no action until they get further guidance.
Spark filed its notice of intention to launch the takeover and will need Overseas Investment Office and Commerce Commission approval to proceed. Spark may waive a condition to cross the 90 per cent threshold needed to mop-up hold-out shareholders if it secures control of TeamTalk, in which case it would stack the board with its representatives.
The larger telco company stressed the challenges TeamTalk faces from increased competition to its rural ISP due to the government's rural broadband initiative and the capital needs to upgrade its Wellington CityLink fibre network.
Spark has previously signalled a desire to reduce its reliance on network operator Chorus' regulated copper lines and last year talked up the opportunities wireless broadband offers to grow the budget end of the market.
Spark shares increased 0.4 per cent to $3.595 and have gained 13 per cent over the past 12 months.