UWL 1.55% $1.27 uniti wireless limited

Takeover of ST1

  1. 181 Posts.
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    Is there a possibility of getting UWL shares at a 50% discount? Let me explain, but I have to say that this is all speculation at this stage.

    On the 2nd of April, ST1 announced that they had rejected a bid from UWL to take them over. Obviously the offer wasn't nearly high enough and I would guess that UWL weren't aware of how well the ST1 business was going, as they hadn't yet provided a quarterly business update or announced their recent acquisition. What's interesting is that the two businesses from an earnings point of view, after both announcing an acquisition recently, are extremely similar. They do however operate in slightly different areas of the telco world, with ST1 focused on the high margin business sector and UWL predominately servicing the retail household sector. UWL has had a stellar share price run since announcing the appointment of Vaughan Bowen, who is very respected in the telco industry, which has given the business a lot of publicity as investors are hoping he can build UWL into a huge business, as he previously did with M2 Telecommunications.

    The interesting thing is that although the businesses are almost identical from an earnings perspective, the UWL market cap of around $100m is double ST1's circular $50m. This I put down purely to the optimistic expectations around UWL, due to its managements previous track record.

    So is it likely that UWL will make another bid for ST1 or is there a possibility the companies will merge. Here are the reasons I think it would be beneficial and why I think it is likely at some stage the two companies will join forces -

    BENIFITS TO UWL
    - Huge increase in coverage around Australia with ST1's large presence in Melbourne and Brisbane especially
    - The doubling of revenues and profits as a base case and then the addition of significant synergies
    - Scale to take on the big guys and make larger acquisitions without competing with ST1
    - Large exposure to the higher margin business sector
    - The benefit of ST1's large recent investment in infrastructure, which makes them the fastest and best ISP in Australia
    - The benefit of the ST1's management teams experience and management capabilities
    - The increasing of the total market cap allowing more fundies to invest in the business, which should expand the PE ratio of the business over the longer term.

    BENEFITS TO ST1
    - Huge increase in coverage and scale with UWL's presence in Adelaide especially
    - The doubling of revenues and profits as a base case and then the addition of significant synergies
    - Scale to take on the big guys and make larger acquisitions without competing with UWL, who we know are very aggressive in this area.
    - Increased market credibility having Vaughan and the accomplished UWL management team running the business, with ST1 management. This is huge and would be a massive catalyst for ST1 especially.
    - The increasing of the total market cap allowing more fundies to invest in the business, which should expand the PE ratio of the business dramatically in the short term and over the longer term.

    I have probably left out a number of benefits, but in my opinion the merging of the two businesses is compelling from both sides. It essentially gives them both enormous scale, expertise and credibility, improving growth opportunites dramatically. The big question is, which business are you best owning with this in mind? I actually own both including 5GN as I am bullish on the whole sector, but you would have to think that if it did come off there is much better value in ST1, with half the market cap and similar earnings to UWL at present. The question is how likely is it to happen? In my opinion, as the benefits are so great for both sides, it's very likely but could take some time. If it takes a long time, then owning UWL at these levels, you are betting on managements ability to increase the businesses value at a much greater pace than ST1 are able to accomplish. That said if a deal happened in the next few months, ST1 could look to be amazing value when taking into account their market cap to earnings, If the two businesses are merged, then you would end up with more shares in UWL than you would buying UWL direct, due to the market cap difference, which would allow ST1 to negotiate a deal offering significantly higher value than its current share price.

    It's all speculation at this stage, but with the recent offer, it's wise to be aware of the potential if a deal was done.

 
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