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Seven's blocking stake in Unwired

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Bryan Frith | September 28, 2007

KERRY Stokes probably thought that when Seven Network associate Engin last week secured a 19.9 per cent stake in Unwired Group it would serve as a sufficient blocking stake to discourage a bid from any other party.

Instead it seems to have had the reverse effect and potential bidders have been sounding out Unwired, so Seven is rolling out a takeover offer for the wireless broadband carrier.

If the talk is right, Canadian wireless network operator Craig Wireless expressed an interest in bidding for Unwired, while there are suggestions Optus may also be interested.

Craig Wireless, founded in 1995 by the Craig family, is headquartered in Winnipeg. The company recently listed on the Toronto Stock Exchange through the reverse takeover of SSQ Acquisitions, a capital pool company.

At the same time, it raised $C40 million ($45 million) through a share placement. Craig has said it is looking to the international market to make acquisitions. It is thought that an offer from Craig would have involved scrip in the Canadian company, whereas Seven is offering cash, which is likely to have more appeal to Unwired shareholders.

Seven is making a two-tier cash offer - 45c a share, which will increase to 50c a share if Seven achieves a relevant interest in 90 per cent of Unwired by a specified date, but no earlier than November 8. At 45c a share, that's a premium of 58 per cent to the 28.5c a share at which Unwired was trading before Engin began buying its stake. At 50c it's a 76 per cent premium.

Unwired directors intend to recommend acceptance in the absence of a superior offer. Seven said yesterday the offer would be mailed around the end of September - days away. That must mean the bidder's statement will be lodged in the next day or so and that Unwired will waive the two-week waiting period and allow the bid document to be posted immediately it is lodged.

That will allow Unwired holders to accept the bid by November 8 in order to obtain the additional 5c a share.

The offer is conditional only on no prescribed occurrences. That would enable Seven to buy on-market if the share price fell below its offer price. Unwired shares yesterday sold up to 51c, before easing to close 1c higher on the day, at 48.5c.

Engin, in which Seven has a 34 per cent shareholding, announced early this month that it had acquired about 10.38 per cent of Unwired on-market, mainly at 40c a share. Last week it lifted its stake to 19.8 per cent by acquiring the interests of the founder, and until recently director, Steve Cosser, mainly at 45c a share. The shareholding cost $20 million, which was funded by a convertible note issued to that amount from a subsidiary of Seven.

Engin, a broadband voice over internet protocol phone company, said it regarded the Unwired holding as a strategic investment and it saw opportunities to use the assets of both companies to unlock substantial synergies and other benefits. Engin had no present intention of making a takeover offer for Unwired, although it did not rule out the possibility of exploring a merger transaction in the future.

Seven's offer capitalises Unwired at $127 million. Engin is capitalised at only $55 million and, as it had to debt-fund its 20 per cent stake, a full bid for Unwired would have been a big ask. Moreover, Unwired requires about $200 million to roll out its proposed WiMax wireless broadband network.

The acquisition of Unwired will enable Seven to strongly enhance its digital media platform, including its plans for digital television and its online activities through the Yahoo!7 joint venture. It will mean that Unwired now has the capital backing to complete, and possibly accelerate, the building of its WiMax network and that will mean increased competition in the broadband market, with the industry leader, Telstra having the most to lose.

Unwired holds the spectrum licences for the 2.3GHz and 3.5GHz frequencies in the major metropolitan areas: Sydney, Melbourne, Brisbane, Adelaide, Perth and Canberra and it has a swap arrangement with Austar, which holds those spectrum licences in the regions.

Unwired has a massive 90MHz of capacity, twice that of Telstra. Most global operators have less than 30MHz of capacity. Unwired listed on the ASX in 2003 in a backdoor listing through a company known as Breathe Group. Unwired raised $100 million at a the time through an offering of shares at an issue price of 90c a share.

The company incurred a loss of $25 million in 2007 and has accumulated losses of $129 million. However, it returned a positive EBITDA in the second half of the year, which suggests it is turning the corner.

The company has been held back by an inability to raise the amounts of capital it needs. It has had to resort to a series of small debt and equity raisings, including a $37 million convertible note issue to Intel, a $15 million equity facility from the US-based investment fund Cornell Capital Partners and a $5 million convertible note issue to Mitsui.

Intel's notes, which are convertible at 60c a share, would give it a 22 per cent stake in Unwired, but Intel's interest is in having its microchips used in the WiMax network, rather than becoming a shareholder. It is likely to favour a Seven takeover of Unwired because it will give the company the capital capacity it has lacked.

The takeover also provides a bonus for Intel. The note deed provides that if there is a change of control and Unwired shares at that time are selling at 67.5c or below, the notes will redeem at a 50 per cent premium.

Seven says its offer delivers value to Unwired shareholders today for the future potential of the company. It's also a good deal for Seven. Its bid values Unwired at $127 million, which is not far off the amount Unwired paid to acquire the wireless spectrum licences.