iiNet bidding war begins, Optus waiting in the wings

While there was speculation that M2 Group Ltd (ASX: MTU) would not make a bid after announcing a deal for an NZ telco Call Plus on 13 April 2105, they just announced a very ambitious counter bid to TPG Telecom's (ASX: TPM) existing $8.60 all-cash offer for iiNet (ASX: IIN).

It seems this is all part of a master plan and caps off an incredible run for MTU shareholders.

The bid, which is subject to the IIN board supporting it, and would be conducted by way of Scheme of Arrangement, is worth a headline $10.00 per share and is made up of 0.803 MTU shares plus a $0.75 special dividend (worth another 32c in franking credits).

MTU has cheekily stated that the deal is worth $11.37 because of the huge synergies the deal will create and will flow to IIN shareholders as owners of almost half of the combined entity.

One aspect of the deal that will be cheered by shareholders is that by receiving shares as consideration, shareholders would be able to enjoy scrip-for-scrip rollover relief and be able to defer any capital gains – an outcome that iiNet's major shareholder Michael Malone was pushing for from TPM.

If MTU's estimated synergies are true then TPM can certainly afford to pay more and we'd be shocked if TPM doesn't come back with a new offer. Particularly as TPM has fallen 6% on the open this morning and CEO David Teoh would not be happy with this turn of events.

Assuming the iiNet board supports the new offer – and we expect it will – then TPM will have three days to increase its own offer. And of course Optus (owned by Singtel and easily the one able to finance the biggest cash offer) would still be waiting in the wings watching events unfold.

The other fantastic news from this bid is that of all the potential bidders, MTU is the one least likely to prompt a response from the ACCC that vastly reduces the risk in holding IIN. (We will of course be exposed to the moves in MTU's price but there should be a good buffer to our entry price.)

We will be eagerly watching the events unfold this week, given it's in an industry that has been ripe for consolidation for some time now. We have already seen some of this (M2 Telco [MTU] bought iPrimus and Dodo while TPM recently bought AAPT), but there are still probably too many players in the space. A combined TPM/IIN will have around 1.7 million retail fixed-line internet subscribers, which would trail only Telstra (TLS) at 3 million customers. Optus is currently the second biggest player and I expect would be immediately running the numbers on whether a bid for IIN could work.

 Rivkin, its clients and its proprietary model portfolios first purchased IIN at $8.49 on 13 March, 2015, as part of its Event Strategy:

Please remember that any recommendations or articles pertain to general advice only. Speak to your financial advisor to clarify if taking this position is right for you.