Spark is bidding to take over NZX listed mobile radio, metro fibre and Internet service provider TeamTalk at a price of $22.7m, which represents about an 80 percent premium on TeamTalk’s recent share price. Spark says the move is inline with its intention, set out in its FY16 results announcement, to achieve greater control of the end-to-end customer experience for its business customers.
TeamTalk comprises three operating businesses: TeamTalk (mobile radio services), CityLink (provision of metro fibre services primarily in the Wellington CBD) and Farmside (and internet service provider focused on the rural market).
The move comes at the end of difficult year for TeamTalk. Founding CEO David Ware resigned in April citing stress, and his comments at the time suggested the company would have been lacking effective leadership for some time.
In August TeamTalk engaged investment banking advisors, Cameron Partners, to work with both its board and new CEO, Andrew Miller, to assist with a review of its strategy and the evaluation of options. Later that month it announced an after tax loss of $1.3m for FY16 on revenues that were 0.6 percent down on FY15, at $57.3m.
Spark managing director, Simon Moutter described TeamTalk as a small operator in the New Zealand telco market whose financial performance had declined over the last few years that was facing significant re-investment requirements across its businesses.
“Given TeamTalk’s debt position (last reported bank debt was $33.6m with a maturity date of September 2017), and small market capitalisation (approximately $12.8m), its ability to fund this investment is constrained. This has been reflected in TeamTalk’s decision not to pay a final dividend to shareholders in FY16,” Moutter said.
“We believe this is a compelling offer, at a significant premium to the current TeamTalk share price, which is unlikely to be achieved by other means. This offer is advantageous to TeamTalk shareholders in being an offer for the full TeamTalk business. Spark, as a digital services company with its own extensive networks, distribution channels and customer base, has the ability to provide a more positive pathway forward for TeamTalk customers and staff.
He added: “The reality is TeamTalk shares have significantly underperformed relative to the New Zealand market over the last three years, with much lower total returns for investors than the NZX50 gross return index on a Total Shareholder Return (TSR) basis.
In its offer document, Spark tells Teamtalk shareholders that their company faces a number of business changes and challenges, which represent substantial near-term uncertainty and are likely to have a negative impact on the financial performance of the business.
“TeamTalk has faced a significant challenge from the Government's Rural Broadband Initiative,” Spark said. “This has created competition for TeamTalk's Farmside satellite broadband product, impacting Farmside's financial performance. RBI solutions offer faster speeds and have a lower capital cost, and as such, TeamTalk has been forced to migrate customers to RBI solutions. The effect of each customer migration is a decline in TeamTalk's revenue, capital expenditure incurred, and a write-off of any remaining value in its satellite installation.”
Spark noted that Farmside EBITDA had decreased from $2.5m in FY15 to $1.4m in FY16, and that TeamTalk had recognised a $1.8m impairment of fixed assets and inventory and a $1.0m impairment of goodwill in FY16.
Spark noted also that parts of CityLink Wellington fibre network would need to be migrated off the city’s trolley bus infrastructure, which will be replaced over the next few years. “TeamTalk has indicated this will be a ‘major, multimillion dollar undertaking’, but, again, the timing and magnitude of the financial impact on TeamTalk has not been articulated. This is likely to negatively impact TeamTalk's future value,” Spark said.