On June 7th 2017, Vocus Group Limited (ASX code: VOC) received an unsolicited proposal from Kohlberg Kravis Roberts & Co. (KKR) to acquire all of the issued capital in Vocus Group Limited for a cash offer price of $3.50 per share. On the day prior to the receipt of the merger proposal, the closing price of Vocus Group Limited shares was $2.86. The proposed acquisition is to be completed using a scheme of arrangement bid process if it is supported by the Board of Directors of Vocus Group Limited. The Board of Directors formed an Independent Board Committee (IBC), which held an initial meeting on the evening of June 7th 2017 to assess the acquisition approach from KKR and to determine a response strategy for the wider Board of Directors and communication to the company’s shareholders regarding the proposal. The indicative timetable was for the company to announce its response to the acquisition proposal from KKR to the market by August 21st 2017. Vocus Group Limited is an ASX-listed, vertically integrated telecommunications provider which operates in the Australian and New Zealand telecommunications markets. The company owns a national fibre infrastructure network connecting all capital cities and most regional cities across Australia and New Zealand, with its fibre communications network directly connecting to more than 5,500 buildings. Vocus Group Limited provides a portfolio of communications brands and products for corporate, small business, government and residential customers across Australia and New Zealand. The company also provides international internet protocol (IP) transit services, including submarine cable capacity connecting Australia to Singapore, New Zealand and the United States. It also operates data centres supporting the provision of its communication services. Kohlberg Kravis Roberts & Co. is a well-known unlisted private equity business which is based in the United States, but has undertaken various acquisition transactions and other investments involving listed and unlisted businesses in Australia. The company raises funds by issuing debentures and similar debt securities, and uses the proceeds raised for investment purposes, taking either minority or majority ownership stakes in businesses. The company then actively engages in the management and restructuring of businesses in which it invests and crystallises any value creation using investment exit strategies such as trade sales and sharemarket listings. The following table provides a summary of financial, structural and performance information for Vocus Group Limited for the June 30th financial year ends from 2013 to 2017 (All figures, except for per share, issued capital and percentage statistics, are expressed in A$Million): 1 ????????2015 ???2016 ?????????????101.5036 ??????528.2674 ????585.6758 ?4,500.8382 ?????5.770 ???8.520 ?????23.648 ???42.814 ?????2.9845 ???1.4179 ?????0.2441 ???0.1986 ?????0.0830 ??????0.1750 ????34.0025 ?88.1168 ?????????????149.0040 ???829.9380 ?????104.7970 ??????616.0130 ????57.1700 ?234.8980 ?????38.4860 ???156.4110 ?????33.2080 ??????132.8260 ????24.7730 ?104.9120 ?????19.8500 ???64.2520 ?????5.2780 ???23.5850 ?????8.4350 ???27.9140 ?????34.6940 ???98.0680 ?????6.4623 ??????2.2350 ????12.6239 ?3.3051 ?????????????15.1700 ???128.6290 ?????41.9300 ???333.6840 ?????204.6190 ???522.4130 ?????383.3440 ??????4,694.0190 ????40.8780 ?400.5640 ?????117.9590 ???872.3820 ?????187.1050 ???1,519.7340 ?????144.2440 ???3,100.7380 ?????48.1480 ???57.0800 ?????196.2390 ??????3,174.2850 ????30.7710 ????18.5850 ????95.3455 ????47.8764 ???????2013 2014 2017 ????????Key indicators No. of issued shares (Mill.) Market capitalisation Share price ($) Price/Earnings ratio (times) Market / Book ratio (times) Earnings per share ($) Dividends per share ($) Dividend payout ratio (%) Trading Information Operating revenue Operating expenses Earnings before interest, taxes, depreciation and amortisation (EBITDA) Earnings before interest and taxes (EBIT) Profit before tax Net profit after tax before abnormals Net profit after tax after abnormals Net interest expense Income tax expense Net operating cash flows Return on total assets (%) Return on equity (%) Structural information Cash and cash equivalents Current assets Property, plant & equipment Total assets Current liabilities Long-term debt Total liabilities Share capital Retained earnings Total shareholders’ equity Long-term debt to Total assets (%) Total liabilities to shareholders’ equity (%) 76.2234 160.0691 2.100 18.261 2.2523 0.1146 0.0100 8.7260 66.4998 39.8472 22.2200 13.3545 12.3195 8.7375 5.0983 1.0350 3.5820 16.6902 5.2101 12.2944 14.1691 25.4160 50.7770 167.7028 36.2137 56.9864 96.6339 46.0687 24.0954 71.0689 33.9806 135.9721 90.8869 432.622 4.760 32.828 3.1550 0.1500 0.0180 12.0000 91.7530 59.4120 33.0730 21.3610 19.5400 13.6290 12.9250 1.8210 5.9110 24.1700 6.4342 9.9392 44.5570 56.0680 63.3840 211.8220 26.3310 41.9310 74.6980 98.5940 35.8910 137.1240 19.7954 54.4748 619.9819 2,089.3390 3.370 -1.452 0.9072 -2.3214 0.0600 -2.5846 1,820.5770 2,991.6770 -1,170.9710 -1,364.5360 -1,405.4410 -1,439.2020 -1,464.8700 40.9050 33.7610 219.0720 34.5000 62.8912 50.1940 327.4850 1,542.9790 4,171.5960 396.7500 1,065.8160 1,868.4720 3,774.8340 -1,494.4130 2,303.1240 25.5494 81.1277 2 Other relevant information relating to Vocus Group Limited or the wider corporate and sharemarket sectors is: • The beta coefficient for Vocus Group Limited is 0.61, compared to the average beta coefficient for the telecommunications industry of 0.75. • The 10-year Australian Government Bond yield was 2.675% on June 30th 2017. • The S&P/ASX 200 Accumulation Index has provided an average annual return of 9.976% over the most recent 8-year period. • Consensus analyst forecasts for EBITDA and earnings per share (EPS) for the 2018 financial year are $300 million and $0.250 per share, respectively. • Long-term earnings (including residual earnings) and dividend growth forecasts for Vocus Group Limited are 4.00% and 5.00%, respectively. • The issued share capital for Vocus Group Limited at the end of 2018 financial year is expected to be 670 million shares. • Assume that the analysis is being undertaken on June 30th 2017. The following table provides information on Australian listed peer companies operating in the same industry as Vocus Group Limited as at June 30th 2017 (figures are in A$Million unless otherwise stated): ??????MNF Group ???Spark New Zealand ?????Telstra Corporation ???TPG Telecom ???Market capitalisation ???318.0412 ???6,684.2827 ?????51,141.1810 ???4,836.2967 ???No. of issued shares (Mill.) ???72.7783 ???1,856.7452 ?????11,893.2979 ???848.4731 ???Share price ($) ???4.3700 ???3.6000 ?????4.3000 ???5.7000 ???Book value of Equity ?????68.3470 ?????1,572.3810 ???????14,808.000 ??????590.7770 ???Enterprise value ?276.8730 ?7,488.7131 ??67,487.1807 ?12,224.2101 ???EBITDA ???22.5310 ???969.5238 ?????11,029.9000 ???791.0000 ???Net profit after tax ???12.5640 ???219.2467 ?????4,224.900 ???326.6000 ???Sales revenue ?????191.752 ?????3,500.1174 ???????25,912.0000 ??????2,387.8000 ??In relation to recent acquisition activity in the telecommunications sector in Australia, the following table provides deal multiples information for target companies from the telecommunications sector involved in acquisitions in the last 7 years: ?????Date announced ?Target company ???Offer price / Book value ?????Offer price / EPS ???Bid Premium Offered ?????22/11/10 ?Clever Communication Australia Limited ???1.570 ?????10.187 ???28.574% ?????12/07/13 ????Inabox Group Limited ????2.632 ???????13.866 ??????15.550% ????28/09/15 M2 Group Limited ?2.280 ??26.014 ?28.651% ?????13/09/16 ????BigAir Group Limited ????1.910 ???????20.923 ??????29.787% ??As the lead financial advisor to Vocus Group Limited on the acquisition proposal from KKR, the Independent Board Committee has requested your firm to prepare an independent expert’s 3 report to assist them in forming a response and recommendation for shareholders relating to the proposal. This expert’s report should include the following content: • The results and conclusions from a financial analysis of Vocus Group Limited, with particular focus on operating, efficiency and performance aspects of the business and, from this, identification of potential sources of value creation from acquiring Vocus Group Limited. • An estimate of the current intrinsic (fundamental) market value of Vocus Group Limited’s equity shares. This valuation estimate should be determined from using a number of valuation metrics and approaches, and can either be presented as a point or range estimate. • Based on the above analysis and any other relevant information or considerations, the provision of a recommendation as to whether the price offered in the acquisition proposal is fair and reasonable or otherwise.
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