The suitor who could head-off Vocus IPO

“Vocus NZ looks like a perfect candidate for the New Zealand Stock Exchange,” says Castle Point Funds partner Richard Stubbs.

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Late last week, ASX-listed Vocus Group confirmed plans for an initial public offering for its NZ business before the end of next year. An exchange wasn’t mentioned in the filing, but the Herald understands it will be NZX-only.

Earlier, Stubbs met with Mark Callander – the head of ASX-listed Vocus’s New Zealand operation, the head of its wholesale operations on both sides of the Tasman and a director of the group – and came away “very impressed”.

“It’s a decent-sized, New Zealand-centric business with a decent market share in a pretty stable industry. With the right management team and the right execution, there is also plenty of potential for growth,” he says.

But will the “perfect candidate” make it to the NZX?

Plans for a local listing of Vodafone’s New Zealand business were headed off by a trade-sale to Infratil and Brookfield Asset Management.

Stubbs sees potential for the same thing happening with Vocus’s NZ operation.

“I wouldn’t be surprised if SkyTV was having a good look at it,” he says.

“It would be a big ask and they have tried something like that in the past with Vodafone, but it could be done.”

The Commerce Commission blocked a proposed Sky TV-Vodafone NZ merger in 2017 on the grounds that it would be likely to lessen competition by creating a strong vertically integrated pay-TV and full-service telecommunications provider owning all premium sports content.

But the competitive landscape has been upended in the meantime by Spark’s move into sports streaming with the telco grabbing key cricket, rugby, football and motorsports rights. And Sky, in turn, has announced an invasion of Spark’s home turf with the launch of Sky Broadband slated next year – which, going by a recent customer survey, could see cut-price internet for those who commit to lots of Sky content.

Other trade buyer candidates could include Trustpower (50 per cent owned by Inftratil) and 2degrees were said to be on the final shortlist of buyers during a 2017 attempt to sell Vocus’ NZ assets (certainly, one Trustpower manager had become an expert on the telco’s finances). New Vocus management pulled the plug on the sale in early 2018; it was said bidders were falling short of a A$500m asking price (no price was ever made public).

What's it worth? Two takes

So what is Vocus’ NZ operation worth?

A Jarden note issued after the IPO was confirmed, says, “Given the mix of retail and enterprise operations, we value Vocus NZ on a 6.0x FY2021 estimated ebitda
multiple, which implies a total valuation of A$416m (or A$0.66/share).

But the wealth manager sees a focus on Vocus’ enterprise and wholesale assets. That leads it to the following kicker:

“Given the extensive fibre assets, we suspect the company will seek to benchmark the business against fibre operators globally, who trade on an average multiple of around 9.5x.

“Applying this multiple to the Vocus NZ ebitda results in a valuation of around A$660m or A$1.05/share – 40 per cent more than our valuation for the business.”

But although Jarden finds that too heady, it notes a valuation at that level would be “broadly consistent with the Spark NZ trading multiple of around 9x.”

The assets up for grabs

Vocus NZ’s assets on this side of the Tasman include retail internet service providers Orcon, Slingshot and Flip (bought from NZ’s CallPlus for $250 million in 2016); Stuff Fibre (bought from Nine earlier this year in a deal referenced at $8m in a Vocus filing); the nationwide fibre network formerly owned by FX Networks (bought in 2014 for $116m), data centres formerly owned by Maxnet (bought in 2012 for $10m and since upgraded) and small power retailer Switch Utilities.

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With around 225,000 customers, Vocus NZ is our third-largest fixed-line broadband operator, behind Spark (around 700,000 customers) and Vodafone (420,000), and ahead of 2degrees (120,000) and Trustpower (110,000).

Vocus NZ recently reported FY2020 revenue that rose 6 per cent to $398.8m for the year to June 30, while ebitda rose 4 per cent to $65.4m (all figures in NZ$D).

It was the NZ operation’s fifth straight year of operating earnings growth.

Vocus did not give an earnings split between it different operations, but on the revenue side, its “Enterprise, Government and Wholesale” business grew 3 per cent to take in $134.9m, while its retail side grew 6 per cent $263.9m (and is likely to increase as a proportion in FY2021, given Vocus’ purchase of Stuff Fibre and its 20,000 customers near the close of FY2020).

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The company reported that average broadband revenue per user per month (arpu) had nudged up from the year-ago $71.61 to $$71.91 and churn dropped fractionally from 2.3 per cent to 2.2 per cent, but its average margin per user per month had slipped from $28.02 to $26.07.

And while the rise of the National Broadband Network (NBN) has been a pain-point for Vocus’ retail operation across the ditch (and those of other retailers), our Ultrafast Broadband (UFB) continues to be a bright point for Vocus NZ.

It holds 15 per cent market share in UFB vs its 13 per cent overall, and has had noted strength in high-end “1 gig plans”. Vocus NZ’s Orcon brand is the only top-tier ISP that’s offering Chorus’ new $149-$199 superfast “HyperFibre” service.

Vocus NZ’s forays into bundling energy (33,000 customers) and mobile services (41,000 – using a service wholesaled from Spark) remain modest. In mobile, Callander is pushing for regulatory change that will open up the wholesale market, and not mincing his words about it. So far, the Commerce Commission isn’t listening.

Sky has been asked for comment.

Vocus Group shares closed Friday at A$4.25 for a A$2.45b market cap, easing back after they spiked from A$4.24 to A$4.37 on the IPO news on Thursday.

The stock is now well above its 2018 trough of A$2.28, though still well off its 2016 high of A$9.29 on the back of hype over the Vocus-M2 merger that, initially, failed to live up to investors’ earnings expectations.

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