A $1.6 billion bid for internet provider iiNet represents good value insists M2 Group's founder Vaughan Bowen but he is betting that rival bidder TPG Telecom is not ready to give up yet.
The bid, which was first revealed in Fairfax Media, ratchets up the stakes in the battle for the Perth-based iiNet, one of the most sought-after brands in the retail internet industry.
It comes less than two months after TPG Telecom launched a $1.4 billion bid for iiNet.
"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."
Whether M2 or TPG is successful, either deal would create Australia's second largest telecommunications provider.
M2, which operates under brands including Dodo and iPrimus, had 508,000 broadband subscribers as of December, compared with iiNet's 975,000 subscriber base. A merged company would push current No. 2 provider Singtel-Optus (with 988,000 subscribers) into third place.
TPG, as of January 31, had 786,000 broadband subscribers. Telstra's Big Pond is the country's biggest fixed-line internet provider with some three million subscribers.
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.
M2 has valued its proposal at $11.37 per iiNet share, which would value the Perth-based provider at $1.85 billion.
However, this would include $1.37 per share "value of estimated synergies that would accrue to iiNet shareholders, who would own approximately 42 per cent of the enlarged M2 Group," M2 said.
Combining just the share and dividend offer would value the offer at about $1.6 billion.
From humble beginnings as a digital messaging hardware provider, M2 has grown to now have a market capitalisation of nearly $2 billion.
"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.
M2 chief executive Geoff Horth said that the company sought to address the concerns expressed by some iiNet shareholders about tax in 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.
"We were mindful of those shareholder concerns when we made this offer."
BT Investment Management's head of smaller companies Paul Hannan, who holds more than 5 per cent of iiNet said he was not surprised there was a competing offer.
"At the moment, [TPG] are now the second fiddle. Clearly, this bid that's been put together by M2 is superior bid, there's no other way that it can be described."
"Clearly the M2 guys have gone to pains 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."
Mr Hannan said he believed that TPG would have no alternative but to come back with an revised offer.
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 provide any commentary around the merits of the M2 proposal, but he expected the board to make a decision on the bid very soon.
"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, but my expectation is that we'll have it done by tonight or tomorrow. But, it does require the completion of some negotiation," Mr Smith told Fairfax Media.