takeover speculation - cdr, tls and optus

AFR 21/09/2005

Every so often financial markets get it wrong about a particular asset or asset class and overshoot either on the upside or the downside.
It is during these events that investors with conviction, patience and the ability to see through short-term volatility can do well.

Recent movements in the share price of Commander Communications provide a case study of the dangers of getting caught with the lemmings and selling because everybody else is.

The consensus among telco analysts is that Commander has a balanced business plan, good management with a track record of delivering on stated objectives.

Commander was established 25 years ago by Telstra to sell, rent and support mobile phone systems for small and medium sized businesses.

Telstra listed the company on the Australian Stock Exchange in 2000 and retained a 20 per cent stake until June, 2003 when the stake was sold to investment bank Babcock & Brown.

Commander has transformed itself from a reseller of phone systems into a company that gets its revenue from reselling systems, providing information technology services and running its communications infrastructure.

Telco analyst Tony Wilson at UBS issued a mammoth report on Commander last week that looked at the company from every possible angle and concluded with a neutral rating. The report highlighted the transformation of Commander over the past three years with the acquisition of the following companies: IT services group Centari in July, 2002; fixed and mobile voice provider RSL Com in March, 2003; telco network manager Jtec in February, 2004; IT solutions group Axon in August, 2004; phone systems distributor LSP in November, 2004; and wireless network owner Personal Broadband Australia in June this year.

Commander's share price was travelling well until the release of its full-year results on August 22. Although the results were in line with company forecasts, the market took fright at the disclosure of capital expenditure of about $30 million. The shares plunged 18 per cent from about $2.50 to $2.05 in a day.

Managing director Adrian Coote said that it was during this hiatus that the company's main institutional shareholders topped up their holdings.

Since then a mystery buyer has attempted to sound out institutions about buying their stock at $2.55.

Citigroup analysts Tim Smeallie and Phil Campbell believe there could be a bidding war between Telstra and Optus to gain control of Commander.

They said Telstra could justify a price of $2.82 just to protect its $171 million in annual wholesale revenue it receives from Commander.

They said synergies available to Optus meant it could be willing to pay $3.09 for Commander.

Pity the lemmings who sold on August 22.