Spark: Two private equity firms reportedly circling, analyst sees pros and cons

Spark's share price has fallen sharply over the last year. Photo / Chris Keall

At least two private equity firms are “going over” Spark as they “ponder a buyout proposal,” according to a report in The Australian‘s Dataroom market gossip column.

“We don’t comment on rumour or speculation,” a Spark spokeswoman told the Herald.

The telco’s share price has spiralled to a series of 10-year lows over the past 12 months but Morningstar and Craigs Investment Partners analysts are among those who think the stock has been over-sold.

Shares were up 2.5% to $2.24 in early trading for a market cap of $4.2 billion. The stock is down 47% over the past year.

Morningstar’s Brian Han told the Herald he was not aware of any private equity approach. But in general terms: “I think Spark would be a really good target.”

He said the firm was in a stable, rational industry with low risk of a new market entrant – attributes that private equity loved.

“That’s the whole reason that Brookfield and Infratil bought into One NZ [formerly Vodafone New Zealand] and Infratil went on to buy the whole company,” Han said.

It was also a low point in New Zealand’s economic cycle and Spark’s earnings cycle – also factors with strong appeal to private equity, Han said.

On the flipside: “They would also look at Spark’s debt pile [the telco’s net debt increased by $297 million to $2.74.b in the first half] and ask ‘what else can I sell?’,” Han said.

The telco had already sold its passive mobile network assets. Selling part of its data centre business (already said to be the subject of any auction, Spark won’t comment), its remaining 41% stake in the Southern Cross Cable and its IT business were all possibilities.

Spark recently announced contracts with Indian outsourcing giant Infosys and Nokia as part of its drive to save $80m to $100m in operating costs this financial year, including $50m in labour costs – implying a cut of around 10% of its workforce or 500 jobs.

The telco is also still on a mission – first flagged in August last year – to find an investment partner for an up-to-$1b push to expand its data centre operations over the next five to seven years.

The depressed sharemarket over the past 18 months has seen increased buyout interest, with Adamantem Capital and Sir Stephen Tindall teaming in a tilt to take The Warehouse Group private, several unnamed parties making non-binding offers for Rakon, a Canadian software player making an unsolicited bid for Eroad, a mystery buyer in talks with Sky TV, a Melbourne firm showing interest in Metro Performance Glass.

None of those deals came to fruition, but NZX-listed retirement village owner-operator Arvida was sold to US private equity firm Stonepeak for $1.2b.

Chris Keall is an Auckland-based member of the Herald‘s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.