M2 Group founder Vaughan Bowen is confident the telecommunications provider's counter offer for iiNet, which values it at $1.6 billion, is a good deal for the company's shareholders, but anticipates rival bidder TPG Telecom will fight back.
The bid, which was first revealed in Street Talk, comes less than two months after TPG Telecom announced an $8.60-a-share offer to buy Perth-based iiNet for $1.4 billion.
"We're in there having a go at the iiNet opportunity," Mr Bowen told Fairfax Media. "Obviously we're realistic about that, we're in a very competitive situation with a very worthy adversary in that one."
Regardless of whether M2 or TPG is ultimately successful, either deal would create Australia's second largest telecommunications provider.
M2 had 508,000 broadband subscribers as of December, compared with iiNet's 975,000 subscriber base. A merged company would have 1.48 internet million users, pushing No. 2 provider Singtel-Optus (with 988,000 subscribers) into third place. TPG had 786,000 broadband subscribers in January. Telstra's Big Pond is the country's biggest fixed-line internet provider with some 3 million subscribers.
M2 has come a long way since it was incorporated just after Mr Bowen's 27th birthday in 1999 as Messagemate, a company which sold digital messaging devices.
After battling for two years, the business was struggling to make ends meet. Mr Bowen decided selling messaging products was a "tough slog" and instead moved into telecommunications – taking the two Ms out of Messagemate and creating M2 - with help from friends and family.
"We were in a really fragile position and raised some money in late 2001; around $1 million basically from friends and relatives to get the business over the hump that it needed to get over and get it the fuel that it required to start doing the telco services re-selling," Mr Bowen said.
"For a while, as you're getting things going, you're just hoping your expenses are less than your revenues."
In 2004, after raising $2 million in an initial public offering, M2 listed on the ASX "with a glorious market capitalisation of $14 million," Mr Bowen said. "A micro-micro cap is probably how you could have described us."
M2 now has a market capitalisation of nearly $2 billion.
Pride in the company's growth
"It's pride and surprise beyond words. The business has grown up quite dramatically. I never envisaged that there would be a '$B' attached to our business in terms of its scale," Mr Bowen said.
Under M2's proposal, iiNet shareholders would receive 0.803 of an M2 share per iiNet share, as well as 75¢ per share by way of a special dividend. iiNet shareholders would own approximately 42 per cent of the new M2 group under the proposal.
M2 has valued its proposal at $11.37 per iiNet share, which would value the Perth-based provider at $1.85 billion.
However, the value of its bid includes $1.37 per share worth of "estimated synergies that would accrue to iiNet shareholders, who would own approximately 42 per cent of the enlarged M2 Group," M2 said in a statement to the Australia Securities Exchange.
Combining just the share and dividend offer would value the offer at about $1.6 billion.
M2 chief executive Geoff Horth said that the company sought to address the concerns expressed by some iiNet shareholders about the make-up of the TPG bid.
"It's not by chance that our offer has a majority scrip component, reflecting iiNet shareholders' concerns around capital gains tax rollover and the opportunity to share in the benefits of enlarged business and the synergies extract," Mr Horth said.
iiNet shareholders welcomed M2's competing bid because it involves equity, compared with TPG's all cash offer.
"Clearly the M2 guys have gone to pain to point out the deficiencies of the TPG bid in clearly identifying the synergies and saying how they'll share it with a scrip bid – which is one of the things we've been asking for," BT Investment Management head of smaller companies Paul Hannan said. BT owns more than 5 per cent of iiNet.
"TPG have got everything to lose. They've got no alternative but to come back with an alternative tentative arrangement that results in some sort of better outcome than what the market is valuing the M2 bid at."
TPG did not respond to Fairfax Media's calls for comment.
On Monday, iiNet shares surged 13.2 per cent to $9.80, while M2 shares slipped 5.4 per cent to $10.90. TPG shares dropped 6.2 per cent to $9.01.
iiNet chairman Mike Smith said the company could not comment on the merits of the M2 bid, but said the board was likely to make a decision "tonight or tomorrow".
"We met as a board this morning, we'll meet again this evening. It is quite a bit of fine detail that we need to get through," Mr Smith told Fairfax Media. "But, it does require the completion of some negotiation."
Australian Competition and Consumer Commission chairman Rod Sims said the watchdog will use the same framework to analyse M2's bid as it did with TPG's.
"We'd look at a range of factors, including the relative market positioning of the players and it may well be that M2 doesn't quite have the positioning of iiNet and TPG, but that's just one of many factors that we'll take into account," Mr Sims said.
"TPG and M2 are different types of players and so that might lead to a slightly different assessment, but we don't comment on these things as they go."
