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Vocus, M2 Group Plan Merger

09/27/2015 | 08:45pm US/Eastern

MELBOURNE, Australia?The wave of consolidation sweeping up midsize Australian telecommunications companies this year continued Monday with an agreement between Vocus Communications Ltd. and rival M2 Group Ltd. to merge, creating a company worth more than 3 billion Australian dollars (US$1.4 billion).

It is the latest shake-up of the industry as smaller companies strive to break the dominance of Telstra Corp. over phone and Internet services and as Australia continues to roll out a national broadband network.

A combination of Vocus and M2 will create the fourth-largest telecoms company in Australia by market value and the third biggest in New Zealand, with revenue of about A$1.8 billion. That narrows the gap with Telstra, the industry leader with a A$63.32 billion market capitalization and annual revenue of more than A$26 billion.

Vocus said it has offered 1.625 of its shares for each M2 share, implying a A$1.93 billion value for M2. It also represents a 25% premium to Friday's closing price for M2 shares, which have fallen more than 20% over the last three months.

The tie-up, which the companies forecast will generate up to A$40 million a year in savings, has been unanimously approved by each company's board ahead of a shareholder vote.

The deal will bring together Vocus's telecoms infrastructure and corporate customer base with M2's services in consumer and small-to-medium-sized business segments. Together, the companies said they would be positioned with the scale to take advantage of Australia's National Broadband Network, a high-speed network being built across the country on the back of fixed-line infrastructure the government agreed in 2012 to buy from Telstra.

"M2 and Vocus are an excellent fit," said M2 Chairman Craig Farrow, who will take up the position of deputy chairman of the merged company while Vocus Chairman David Spence leads a board made up of four directors from each company.

M2 Chief Executive Geoff Horth will become CEO of the merged group, while Vocus founder and CEO James Spenceley will take on an executive director role focusing on telecommunications-infrastructure strategy, the companies said.

Vocus has already been active in the industry's consolidation, closing an all-share deal in July to acquire Amcom Telecommunications Ltd., squeezing out internet-services provider iiNet Ltd. which had been building up a stake in Amcom.

M2 at roughly the same time lost out in the hunt for iiNet to TPG Telecom Ltd., which bought the Internet company in a A$1.56 billion deal that built it into the second-largest telecoms company in Australia, ahead of dual-listed Spark New Zealand Ltd.

The merger of Vocus and M2 will see M2's shareholders end up owning about 56% of the enlarged company, which is expected to be eligible to sit in the blue-chip S&P/ASX 100 index.

The companies said they anticipate annual cost savings through the combination of their two networks, facilities and offices, although at a one-time cost of about A$20 million. The combined fiber networks will be able to tap individual and business customers across all of Australia and New Zealand, leveraging national broadband networks including Australia's NBN, they said.

Write to Robb M. Stewart at robb.stewart@wsj.com

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