M2 Telecommunications grabs People Telecom in $17 billion takeover

Junior telecommunication company M2 Telecommunications has swooped on People Telecom in a $17 million takeover deal that will boost M2’s revenue from $109 million to $250 million.

Junior telecommunication company M2 Telecommunications has swooped on People Telecom in a $17 million takeover deal that will boost M2’s revenue from $109 million to $250 million.

The takeover offer, which is in the form of a scheme of arrangement and includes a mix of cash and M2 shares, values People Telecom shares between 5.46c and 5.81c.

Given People Telecom shares have traded at around 2.5c to 3c for the last three months, the company’s directors had little hesitation in unanimously recommending the deal.

M2 chief executive Vaughan Bowen says M2 understands People Telecom’s business well. As well as following the company closely, M2 has had a supply agreement in place with People.

“It’s a business that on the face of it has been complimentary for many years and there has been dialogue for some time. It was just a sensible transaction.”

Bowen expects the deal will boost M2’s earnings per share by 15% to 20% on an annualised basis, adding around $4 million to the combined group’s profit after tax.

The majority of cost savings will be extracted by cutting corporate and administration costs across the two businesses. For starters, not having to pay People’s ASX listing and director fees will create big savings.

“All of those corporate expenses number in the millions of dollars,” Bowen says. “But the level of integration required is not substantial. We are not going to be banging the two businesses together operationally.”

M2, which was ranked in 15^th place on SmartCompany’s Smart50 awards for 2008, plans to retain the People Telecom brand. M2 has a number of brands within its small stable and Bowen says this model has worked well.

“We think the People Telecom brand in that medium enterprise and small corporate sector is very strong. It’s probably got a higher brand profile than our business, so it adds something.”

The takeover is expected to be completed in April 2009, after People Telecom shareholders vote on the proposal next March.

Bowen say conditions in the telecommunications sector remain robust and the fact that most customers see mobile, phone and internet services as a commodity is actually insulating the sector somewhat.

“We’re not seeing any consumption drop off or any rise in bad debts,” Bowen says. “But that’s not to say we aren’t keeping a close eye on the business. We read the newspapers too.”

He says M2 will concentrate on integrating the People telecommunications sector for between now and the end of the 2008-09 financial year, although the company remains on the lookout for other acquisition opportunities.

“Between now and the end of this financial year we’ll look at our backyard. This transaction is a sizeable bite so we are going to focus on this. This is a big business to manage.”

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