Vodafone NZ buyer Infratil has been dropped from Forsyth Barr's 'Conviction List' of the hottest local stocks .
It has also downgraded Infratil from "outperform" to "neutral" and shaved its 12-month target price
Infratil shares are fully-valued after their recent run-up, ForBarr senior equities analyst Andrew Harvey-Green says, which was the key reason for removing the company from the list.
He says Infratil paid a "full price" for Vodafone's New Zealand operation.
Yesterday, Infratil confirmed a 50:50 $3.4b buyout of Vodafone NZ in partnership with Canadian investment firm Brookfield.
Market whispers had three US private equity outfits also in the frame: Blackstone, KKR and TPG Capital. Their interest would have pushed up the bidding.
The Vodafone deal has drawn comparisons to Infratil's purchase of a 50 per cent stake in Shell Oil NZ, which lead to the highly successful Z Energy listing.
But Harvey-Green notes, "the Vodafone acquisition is not cheap in the same way Z Energy was."
There is potential upside, but it could take years of successful execution to justify the price, he says.
He believes Vodafone NZ likely can achieve the necessary growth, "but it's not a slam dunk."
Vodafone Group and Infratil/Brookfield will each chip in $1b equity to fund the buyout, with Vodafone NZ talking on $1.4b in debt to cover the balance.
Infratil flagged an equity issue of up to $400 million to fund its leg of the deal, and taken on $629m in debt.
Infratil shares fell as much as 6.1 per cent after the deal was announced, and ended the day at $4.48, down 2.6 per cent (the stock is still up 39 per cent over the past year).
Infratil boss Marko Bogoievski said the dip was simply investors reacting to the $400m equity raise.
But First NZ Capital institutional research head Arie Dekker also noted that some "catch-up cap-ex ahead" as Vodafone NZ was freed to pursue plans in areas such as fixed wireless.
And this morning, Harvey-Green noted not just the dilutary effect of issuing new shares in the $400m raise, which he says could be up to 13 cents per share - though he's holding off on his final assessment until Infratil releases more details of its equity raise, expected with its full-year result on Friday.
Like other analysts, Harvey-Green says Infratil's earlier foray into tech with its Canberra Data Centres investment (which has doubled in value to just under $1b in four years) has been well executed - and a key driver of Infratil's recent share run-up.
However, the CDC upside is already built into the stock price.
FNZC shaves target
FNZC, meanwhile, maintained its "neutral" rating on Infratil, but shaved its 12-month target by 3 cents to $4.23.
The wealth manager reiterated that Vodafone NZ's post-deal debt load of $1.4b was manageable.
"While that level of debt looks high compared to Spark, Spark takes a conservative approach on its balance sheet through its focus on retaining an A credit rating," FNZC instituation research head Arie Dekker told the Herald yesterday.
In its latest note, FNZC adds, that the $3.4 billion price is at an implied enterprise value to earnings before interest, taxes, depreciation and amortisation of 6.9 times-7.4 times, a range similar to the recent trading multiples for Spark New Zealand.
"Post-acquisition, Vodafone NZ's gearing of 2.9 times net debt/ebitda seems reasonable. Once the Infratil parent acquisition debt is counted, this appears highly leveraged at 5.5 times net debt/ebitda," the wealth manager says.
Yesterday, veteran competition lawyer Michael Wigley said he doubted there would be any Commerce Act issues with the deal - though he qualified that it wasn't completely clearcut because of Infratil's majority stake in Trustpower, which now holds 5 per cent of the broadband market.
The deal also requires Overseas Investment Office approval.
This morning, FNZC said it did not anticipate the Commerce Commission or the OIO would block the deal.
"It notes the transaction is conditional on Overseas Investment Office and Commerce Commission clearance, both of which are expected to be granted.
"OIO approval is highly likely to be granted given that the transaction effectively increases NZ ownership of Vodafone through Infratil," it said.
"The issue for the Commerce Commission is whether this substantially lessens competition — the crossover is in the fixed broadband market where Vodafone has 26 per cent market share and Trustpower 5 percent. We see this as unlikely to cause issues."
Neither the OIO nor the ComCom has a fixed timeline for approval, but Infratil has told investors it expects their processes to wrap up by August 31.