Spark New Zealand says an independent valuation range for its takeover target, TeamTalk, lacks credibility and the top end of the range amounts to an "absurd premium".
TeamTalk shares surged after the report was released and are now higher than Spark's offer price.
Auckland-based Spark, New Zealand's biggest telecommunications group, has offered 80 cents per share for TeamTalk, a 78 per cent premium to where TeamTalk shares traded before Spark announced its intentions in February.
However Wellington-based TeamTalk said today that a report by independent adviser Grant Samuel & Associates found the underlying value of TeamTalk is between $1.52 to $2.11 per share, prompting its directors to unanimously recommend shareholders reject the offer.
TeamTalk shares rose about 9 per cent to 85 cents and earlier touched 90 cents, the highest since February 2015.
"We believe the valuation lacks real world credibility," said Spark chief financial officer David Chalmers. "The top end of the range represents a premium to the last trading price before the Spark notice of intention of 369 per cent, which is patently absurd."
"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," he said.
TeamTalk has advised its shareholders to reject Spark's "hostile and opportunistic" takeover offer, saying the price is below an independent valuation and seeks to take advantage of a low point in its shares.
"It's not surprising at all is it. The valuation is miles away from that 80 cent offer," said Grant Williamson, director at Hamilton Hindin Greene.
"You can see why the directors would want to reject that offer, it's a very long way from even the lower end of the valuation. Investors will take note of that, they're just too far away from that price range.
"Spark will have to make the next move to offer something more appropriate or back down."
Spark's bid came at a time when New Zealand's rapidly changing telecommunications market created headwinds for TeamTalk, resulting in a series of earnings downgrades as margins have come under increasing pressure.
You can see why the directors would want to reject that offer, it's a very long way from even the lower end of the valuation.
Spark has previously signalled a desire to reduce its reliance on network operator Chorus's regulated copper lines and talked up the opportunities wireless broadband offers to grow the budget end of the market.
A takeover of TeamTalk would give Spark ownership of fibre in Wellington and a wireless rural internet service provider.
"TeamTalk's directors did not encourage or solicit 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 underway," said TeamTalk chair Roger Sowry.
"The Grant Samuel report validates our earlier assessment that Spark's offer is woefully inadequate. The Spark offer fails to reflect the value of TeamTalk's new strategy, strong leadership and forecast growth as demonstrated in our recent results announcement, nor does it attribute any value to the significant synergies and strategic benefits that Spark would capture in the unlikely event their offer were to succeed.
"It is an attempt to gain control of TeamTalk's strategic assets for significantly less than the company's fair value."
"Spark's predatory offer has been tactically made before the company and its shareholders could benefit from the turnaround strategy implemented late last year," said TeamTalk chief executive Andrew Miller.
"It is an attempt to exploit the challenges the company faced during 2016. Those challenges have now largely been addressed and TeamTalk is profitable again.
"Were Spark to succeed, TeamTalk's shareholders would be denied the long-term benefits of the investment made in the company's turnaround," Miller said. "In return for a possible one-time 80 cents per share, shareholders would forgo any future dividends and hand control to Spark at a huge discount."