M2 Telecommunications acquires ISP Dodo for A$203.9m and junior telco Eftel for A$44.1m, 5*FY14 EBITDA

18th March 2013: M2 Telecommunications Group Ltd (ASX:MTU, “M2”) has announced that it has entered into a binding Share Sale Agreement to acquire 100% of privately owned ISP Dodo Australia Holdings Pty Ltd and its related bodies corporate (“Dodo”).  Dodo is a low cost residential Internet Service Provider which also markets utility services. The transaction consists of cash and scrip and values Dodo at $203.9 million, on a debt-free and cash-free basis. For FY13 it projects revenue of A$263m and EBITDA of A$29m, representing an acquisition multiple of 7*FY13 EBITDA.

M2 has also announced that it has signed a Bid Implementation Agreement (“BIA”) with ASX-listed telecommunications firm Eftel Limited (ASX:EFT) whereby M2 will make a recommended off-market takeover offer for all of the issued shares in Eftel.  Eftel is a junior telecommunications firm that provides a full suite of telecommunications services to consumers, corporate and government entities. M2 has offered A$44.1m for Eftel, inclusive of $5.6m net debt. For FY13 it projects revenue of A$80m and EBITDA of A$8m, representing an acquisition multiple of 5.5*FY13 EBITDA.

Management project that the two businesses will contribute more than $50m in EBITDA in fiscal 2014, an acquisition multiple of 5*EBITDA, and an amount equivalent to 40% of M2 Telecommunications existing earnings base.

The Dodo acquisition is expected to complete early May 2013, and the Eftel Acquisition Mid June 2013. The acquisition of Dodo is not conditional on completion of the Eftel Offer.

The acquisitions will make M2 the fourth or fifth largest ISP in Australia, behind Telstra, Optus and iiNet and similar to TPG.

M2 will fund the Acquisitions and refinance existing debt through a combination of new Goldman Sachs fully underwritten 3 year, $400m loan facilities (including an $85m revolving working capital facility) and the issue of approximately 10.5m ordinary shares to Dodo shareholders and 8.7m ordinary shares to Eftel shareholders.

Upon completion of the Acquisitions, M2 expects its pro forma leverage to be approximately 1.8x net debt / FY14 EBITDA. The M2 Board aims to maintain its dividend policy of 70% of NPAT post acquisitions.

Dodo has over 400,000 customers and some 660,000 active Internet services. It recently diversified into the retail electricity and gas markets, with more than 45,000 active energy customers with ~25% of all Dodo’s current energy customers also purchasing a Dodo telecommunication service.

Eftel has over 130,000 active Internet services, and has previously bought a number of other businesses, including the October 2012 purchase of broadband and VoIP company Engin.

Under the terms of the Eftel BIA, Eftel shareholders may elect to receive either:
(a) one share in M2 for every 12.34 Eftel Shares (“All Shares” Election); or
(b) $0.3581 cash for each Eftel Share (“All Cash” Election).
This represents a premium of; 30.2% based on Eftel’s closing share price on 13 March 2013 and 17.2% based on Eftel’s 30 day VWAP.

The Eftel BIA includes customary termination provisions, exclusivity restrictions by Eftel in favour of M2 including a right to be notified of and to match any competing proposal, as well as provision for the payment of a $1 million reimbursement fee by Eftel to M2 or by M2 to Eftel if the Offer does not complete in specific circumstances.

Dodo was founded in 2001 by directors Larry Kestelman and Michael Slepoy. Kestelman is also a director of Eftel, and as a controlling shareholder has backed M2′s bid for Eftel:

“M2′s offer represents an attractive value proposition for Eftel shareholders. The transaction is a unique opportunity to increase Eftel’s presence nationally, enhance its product and service offering to its customers, and create a combined entity that will have a strong and sustainable future. Accordingly, I intend to accept the offer and make an ‘all shares’ election for all of the Eftel shares that I own or otherwise control, in the absence of a superior proposal.”

M2 has entered into a pre-bid option deed with an entity controlled by Larry Kestelman, under which that entity has granted a call option to M2 over 19.9% of the issued Eftel shares that this entity owns or otherwise controls.

Each other Eftel Director has also notified M2 that they intend to accept the Offer and make an “All Shares” Election in respect of all Eftel Shares they or their associated entities own or otherwise control, in the absence of a superior proposal. Collectively, the Eftel and Dodo Directors and their associated entities control approximately 88% of all Eftel Shares on issue.

In aggregate, Mr Kestelman and Mr Slepoy will on completion of the Acquisitions own up to approximately 17.4 million shares in M2, representing approximately 9.8% of M2’s pro forma shares on issue. Mr Kestelman has agreed with M2 to certain M2 share restrictions including a lock up period of 12 months.

The Dodo and Eftel acquisitions are expected to provide numerous benefits to M2, including:

  • a large, profitable and organically growing consumer telecom business which is highly complementary to M2’s existing sizable consumer division
  • a proven management team experienced in the consumer segment, including expertise in delivering low cost new customer acquisition through highly targeted
  • marketing and sales campaigns
  • a nationally recognised low-cost brand (Dodo) which is well positioned to grow market share in the transition to an NBN world
  • established, refined low-cost back-of-house operations and associated systems / technologies
  • established capability, systems, licenses and customer base in electricity and gas, offering considerable cross-sell and new customer organic growth opportunities
  • delivery of considerable scale to M2’s business, with combined FY14 revenues in excess of $1 billion, providing numerous opportunities for both short and long term
  • cost synergies and operational efficiencies

M2 chief executive Geoff Horth said about the deals:

“We are excited to bring Dodo into the M2 Group and are confident that our offer to Eftel shareholders will be well-received. The acquisitions are an excellent complement to our consumer division and combined, our business possesses an excellent capability to grow our share of both the consumer and small to medium business markets. Through the due diligence process we were very pleased to find the businesses to be highly efficient with robust internal systems and processes; a testament to the skill and dedication of the Dodo and Eftel teams. We look forward to welcoming the Dodo and Eftel teams to the M2 Group.”

Advisers
Goldman Sachs and / or its affiliates (“Goldman Sachs”) is acting as exclusive financial adviser to M2 in relation to the Acquisitions and sole mandated lead arranger, underwriter and bookrunner to the $400 million acquisition facilities. Ernst and Young provided independent financial due diligence to M2 in relation to the Acquisitions. KPMG provided independent advice to M2 in respect of the Dodo power and gas business. Minter Ellison is acting as legal adviser to M2 in relation to the Acquisitions.
Addisions has acted as Eftel’s legal adviser.

About M2 Telecommunications Group Ltd
Established in 1999, M2 Telecommunications Group Ltd (“M2”, ASX: MTU) is one of Australia’s largest and most profitable telecommunication service providers, supplying a
broad range of telecommunications products and services to both the retail and wholesale markets. Headquartered in Melbourne, M2 employs approximately 950 people across
Australia and New Zealand.
M2’s retail division targets the small to medium business (“SMB”) market under the Commander brand and the residential market under the iPrimus brand. M2 offers a full
suite of traditional and next generation telecommunications services including fixed line voice services, 3G mobile, mobile broadband, ADSL2 broadband, hosted / managed data services and IP / hosted voice solutions.
M2’s Wholesale division provides wholesale fixed line, mobile and data telecommunications services to small and medium-sized telecommunications service providers and Internet Service Providers.
M2 has consistently delivered growth in profit year-on-year since listing on the ASX in 2004 and in June 2012 was added to the S&P / ASX200.

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