As we discussed in an article just last month, Symbio (ASX: SYM) is the latest in a string of small cap ASX companies to receive a takeover offer.
We highlighted Symbio as a possible acquisition candidate because of its growing and profitable business (a rarity among small ASX companies), rock-solid balance sheet (with $30 million in cash compared to a market capitalisation of $150 million), predictable and recurring revenue, and high insider ownership among the Board of Directors.
In our view, the earnings downgrade last December was a one-off issue, and provided an attractive opportunity to acquire shares in Symbio at a very low valuation–less than 4 times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation, which is a commonly-used metric for the telecommunications industry).
It seems that Superloop (ASX: SLC) shared this view, lobbing a $243 million bid for Symbio on August 1, 2023.
What’s the Offer?/Offer Details/Details of the Bid
Superloop’s offer of $1.425 in cash and 2.14 Superloop shares values Symbio at $243 million or $2.85 per share (at the time of the release). What’s more, the proposal also includes a fully franked dividend to Symbio shareholders of up to $0.35 per share–with franking credits of up to $0.15 per share–bringing the total value to Symbio shareholders to $3.00 per share, a 26% premium to the closing price prior to the announcement.
Superloop is a Brisbane-based telecommunications and internet service provider that readers may be familiar with due to its association with well-known tech entrepreneur Bevan Slattery. While Slattery sold his remaining shares in November last year, he founded Superloop along with other successful tech ventures, including NextDC (ASX: NXT).
In addition to acquiring a profitable and growing business at a low valuation, Superloop has guided to “significant cost synergies” and an “enhanced, sustainable growth outlook”, suggesting that it sees opportunities to both reduce expenses and generate higher revenue once the two companies are combined. While analysts are often sceptical about a company’s ability to generate revenue synergies from a transaction, Symbio is one of Superloop’s largest wholesale clients, which should give management a good level of insight into the business and hit the ground running after the deal closes.
In more positive news (for both companies), Symbio disclosed that it would achieve the upper end of its guidance of $27 to $28 million in EBITDA in FY23, while Superloop upgraded its FY 23 guidance to underlying EBITDA of $37 million–a notable increase from the previous guidance range of $33 to $36 million. Superloop has had stronger-than-expected trading in the second half of the year in each of its three segments, which is great for both Superloop shareholders and Symbio shareholders (given 50% of the purchase price is in scrip, or shares).
After the initial excitement of a takeover offer, it can be quite a process until the merger is actually complete. In this instance, the Symbio Board has offered a four-week non-disclosure and exclusivity period, noting:
“The Symbio Board believes that there is sufficient commercial merit in the Indicative Proposal to enter into the exclusive period for mutual diligence. Importantly, the Board notes that it would only progress the Indicative Proposal on a disciplined basis such that any transaction would be in the best interest of Symbio’s shareholders.”
However, further counter bids from local players such as Aussie Broadband, or an international telco looking to enter the Asia-Pacific region, can’t be ruled out. In fact, despite the healthy premium to Symbio’s share price, the proposal from Superloop values Symbio at just 7.4x EV/EBITDA (enterprise value to EBITDA), a significant discount to Aussie Broadband’s (ASX: ABB) acquisition of Over The Wire at 11.8x EV/EBITDA (based on a $390 million enterprise value and $33 million in forward EBITDA guidance for FY22) just over 16 months ago in March 2022.
Additionally, one recent broker note estimates that the transaction could increase Superloop’s earnings per share (EPS) by a whopping 48%, or more than 100% if it can reduce expenses by around $10 million–not a particularly challenging target at just 4% of Symbio’s cost base. While Symbio shareholders would see some of the benefit from these cost savings and EPS increase (as they would hold around 27% of the post-merger company), Symbio’s Board should also be looking hard to find another suitor or increase Superloop’s bid given the low valuation of the initial offer.
Disclaimer: Symbio Holdings (ASX: SYM) and Aussie Broadband (ASX: ABB) are currently held in the TAMIM Portfolios.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.