June 10, 2019 / 10:52 PM / 6 months ago

Australia's AGL Energy comes back for Vocus with $2.1 bln offer

SYDNEY (Reuters) - AGL Energy Ltd took a second tilt at telecoms firm Vocus Group Ltd on Tuesday with a fresh A$3.02 billion ($2.10 billion) offer - just weeks after withdrawing a previous approach - as it looks to cross-sell to its big customer base.

FILE PHOTO: The corporate logo of communications company Vocus is photographed at their Sydney headquarters, Australia, August 22, 2017. REUTERS/Jason Reed

News that the electricity generator and retailer had gained access to Vocus’ books came on the back of a downgrade to next year’s earnings, announced on Friday evening.

With Australian markets closed on Monday, AGL shares were trading down 7% on Tuesday, while shares in Vocus, rose 8% to A$4.13 per share, still well below AGL’s A$4.85 a share indicative offer.

“Clearly there are some doubts in the minds of investors whether or not this goes ahead,” said Michael McCarthy, chief market strategist at CMC Markets.

Vocus, Australia’s fourth-largest internet provider, is in the midst of turning around its business, and has had three other potential suitors withdraw offers over the past two years.

AGL said its proposal, which is below a A$3.3 billion bid withdrawn by Swedish private equity firm EQT Infrastructure last week, would be accretive to earnings.

Buying Vocus would allow it to develop a “multi-product” offering, selling more energy and data products and services to Vocus’ large wholesale customers, while accelerating the development of Vocus’ broadband fiber network.

However, the market is worried that AGL is looking to offset risks from lower wholesale energy prices with a purchase that would be well outside its core business.

The synergies that AGL could make would pale compared to Vocus achieving its aim of doubling sales to its large customers by 2023 on its own, Credit Suisse analysts said in a note.

“It is not clear that AGL could improve the chances of success; and indeed the distraction of a large integration may well hinder,” they said.

DOWNGRADE HIT

AGL on Friday warned fiscal 2020 earnings will be up to A$100 million lower because its Loy Yang A power station in Victoria would be offline until December due to damage caused by an electrical short.

The gloomy outlook could cut earnings by as much as 27% by 2022, Credit Suisse said, as the company faces political pressure to maintain electricity supply and keep spiking energy prices in check.

Vocus said it had granted AGL exclusive due diligence access for four weeks, but remained focused on its turnaround efforts.

“AGL’s move recognizes that the government is limiting its ability in the traditional utilities market, regulation is getting tighter and returns are falling,” Macquarie analyst Ian Myles said.

“Despite management’s positive comments, it would take time for investors to see delivery of the benefits,” he said.

Facing cut-throat competition, Vocus fell into a downward spiral in 2017 and 2018, cutting and missing profit forecasts as its retail businesses battled falling profit margins.

It has since overcome integration issues, and shifted its focus to its network infrastructure and targeting higher revenues from its corporate and government customers.

(This story corrects earnings decline outlook to 2022, not 2019, in paragraph 12)

Reporting by Paulina Duran in Sydney and Aby Jose Koilparambil in Bengaluru. Additional reporting by Shriya Ramakrishnan; editing by Richard Pullin

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