A corporate battle is shaping up in the small cap telco sector, with Webcentral (recently merged with 5G Networks) recently launching a takeover bid for Cirrus Networks (ASX:CNW).

The deal marks the latest development in WCG/5GN’s growth strategy, as it pursues M&A transactions to grow its footprint in the Australian market.

As advised to the ASX on July 30, Webcentral (ASX:WCG) launched an unconditional on-market cash offer to acquire all of the issued shares in Cirrus for 3.2c per share.

CNW’s board unanimously advised their shareholders to reject the bid, arguing it represented an insufficient control premium for the company’s operations.

WCG’s offer is scheduled to close on September 16, and while it remains live on-market, Stockhead spoke with both companies to get their thoughts on the bid.

Expanded network

For Webcentral CEO Joe Demase, the takeover of Cirrus would give the company an expanded footprint in two key markets — federal government contracts and WA’s mining sector.

“They’ve got established contracts with the federal government, and that’s a market that’s hard to get into because you need security clearance and reference customers so there are some significant barriers to entry there,” he said.

“And they have a strong presence in WA. So those are two geographies and industries where we can see an opportunity to grow our business.”

Takeover rationale

In its annual report, Cirrus flagged full-year revenues of $106m and adjusted EBITDA of $2m (down from $3.7m in FY20).

For Demase, the company has proven its ability to grow revenues, but the profitability metrics “from our side don’t look right”.

“Most companies in our sector are valued on EBITDA multiples, and they had an EBITDA downgrade in their full-year results to what they’d forecasted,” he said.

“So to us it looks attractive from an acquisition perspective because based on a comparison with other companies in the space, we think it should be more profitable.”

Bid rejection

In response to the bid, Cirrus released a Target Statement on August 11 in which its board unanimously recommended that shareholders reject the bid.

In its reasons for rejecting the offer, Cirrus said the 3.2c bid represents an inadequate control premium, and shareholders who accept the bid may miss out on the benefits of future growth in the business.

In response to a Stockhead request for comment, a spokesperson for Cirrus highlighted the points made in the Target Statement.

The spokesperson also noted that CNW shares have traded as high as 3.5c since the offer was made.

In that context, “the market itself has spoken, and obviously regards 3.2 cents as too low”, the Cirrus representative said.

“Ever since the Offer was made the Cirrus shares have traded well above the Offer price.”

Next steps

With both sides engaged in a stalemate for now, investors will be watching for the release of an Independent Expert’s report which has been commissioned to assess the fair value of CNW shares. The report is due by September 16.

Before launching the bid, WCG began acquiring Cirrus shares on-market and now holds an 8.86% stake in the company.

As a shareholder with more than 5% of issued CNW shares, WCG has now exercised its right to issue a 249D notice, calling for a meeting of shareholders to vote on board changes.

As part of its motion, Webcentral said it held concerns that Cirrus board members are “not sufficiently engaged in the business”, and would be better served by directors of WCG’s choosing.

In response, Cirrus said the claims were “misinformed, opportunistic and disingenuous, and designed only to intentionally disrupt Cirrus”.

Demase told Stockhead that the rationale for the 249D was to give shareholders the chance to vote in the event it’s not successful in acquiring more Cirrus shares.

“That way it will be up to shareholders to decide whether we can do a better job than the current board, or have the current directors stay on, or propose someone else,” he said.

He said that since launching the bid, WCG has reached out to Cirrus to try to engage in a due diligence process or gather more information.

“That would be the first step in working out whether to increase the offer. But so far they have been reluctant to talk to us at this stage,” he said.

In that context, it’s “hard to say” what percentage of Cirrus shares WCG will end up with by the September 15 closing date.

“We’ve canvassed some larger (CNW) shareholders who’ve indicated they’d like to see changes, and we believe we’ve got some support,” he said.

He expects Cirrus shares will be fairly tightly traded in the lead-up to September 16, because “rightfully shareholders will be waiting to see if a better offer emerges so they can maximise their return”.

“As we get closer to the end-date, we may see more people selling into our 3.2c share offer if there’s no other larger offer that appears. But it’s hard to predict,” Demase said.