One comment from Sainsbury's report that intrigues me concerns Optus. Quoting Scott Ryall at Macquarie Equities, Sainsbury points out that Optus "could save $10 million-$15 million in traffic costs".
I presume that this is per annum?
Even so, to get to that position, Optus would have to pay the following for UEC (assuming, a zero start from now): 1) MC @ 15/9 of $160M; 2) acquisiton premium @25%, amounting to a further $40M; and 3) debt assumption of $44M @30/6, and upwards of $55M by year end (within an $80M committed facility).
That's a total $244 -255M at this moment (or $250M, midpoint).
If Optus' primary motivation is to save on traffic costs (midpoint suggested savings equal $12.5M), then what's the effective payback period which will need to be satisfied in order for Optus to justify the acquisition of UEC at this time? It ranges into the many years (stretching out to 2020, or beyond - in otherwords, towards or beyond the remaining useful economic life of the UEC network).
I'm all for stronger prices being achieved but experience suggests that SingTel is not now going to pay over the odds for an asset which has a payback period stretching out well beyond 10 years.
The history of Australian M&A activity is littered with the corporate corpses of those companies which have paid far too much in order to acquire the assets (etc) of others.
Companies such as AMP in relation to GIO, SingTel in regard to Optus (an error which even now SingTel is still working on making up for), TMS in regard to MEG, etc. And that's well before you consider many of the overseas acquisitions (particularly in relation to the likes of Cisco, BHP on some of its US minerals' plays, etc), and paying monopoly values for the award of licenses (ie: Vodafone and most 3G telephony bidders, Australis, etc).
Optus may well prove to be a bidder for UEC, but Optus (partcularly with SingTel as the masters) are unlikely to want to pay over the odds, or to endure a likely payback period (for their investment) greater than 5 years.
