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Axia NetMedia (T.AXX) gets friendly $272 million offer from Partners Group

Gaalen Engen Gaalen Engen, .
0 Comments| March 9, 2016


Axia NetMedia (TSX: AXX, Forum) created a stir in the markets today when the company announced that it had entered into an arrangement agreement with Partners Group, a Swiss private investment firm chaired by former UBS boss, Peter Wuffli. Partners Group has agreed to indirectly acquire all of the outstanding common shares of Axia for a cash payment of $4.25 per share for a total equity value, on a fully-diluted basis, of approximately $272 million.
 
According to the news release, the cash consideration for the going private transaction represents a 49% premium to the closing price of the shares on the TSX on March 8, 2016, and a 47% premium to the volume-weighted average trading price of the shares over the last 60 trading days.
 
With the abstention from an interested director, Axia’s BoD, based on the unanimous recommendation given by a special committee of independent directors, has unanimously approved the agreement as being in the best interests of Axia and recommends shareholders vote in favour of the deal.
 
Axia Chairman and CEO, Art Price, commented on the deal, “I am extremely proud of what Axia has accomplished and believe that this agreement with Partners Group offers current shareholders a compelling premium and provides Axia the opportunity to more effectively pursue our long-term investment and growth strategy, continue to provide compelling services to our customers and further enhance our strategic position.”
 
Price will still be at the helm following the deal’s close. Partners Group will collaborate with the executive teams of both Axia and Covage to execute an aggressive growth plan for each company.
 
Brandon Prater, Partner, Co-Head Private Infrastructure, added, “Axia NetMedia provides the 21st century communication infrastructure available in urban centers to rural communities. The Company has built great fibre networks under the expertise of its management team, led by Arthur Price. We are confident that Partners Group's experience in the communications sector, coupled with our global platform, represent an excellent match for Axia's growth strategy and will help the Company to continue its development going forward. Our plan is to provide Axia with the expansion capital it needs and access to our platform to become a world-class communication network operator.”
 
The agreement is still subject to customary closing conditions, and shareholder and regulatory approval which will be sought at a special meeting of shareholders that is expected to be held in May 2016. The deal is not contingent on Partners Group obtaining financing.
 
As part of the agreement Axia has agreed to not pay out dividends until the deal closes and will cease its recently announced normal course issuer bid. The company also has the right to consider and accept a superior bid subject to a matching right in favour of Partners Group.
 
MARKET REACTION:
 
Axia NetMedia shares rose 47.37% to $4.20 per share in morning trading.
 
OUR TAKE:
 
Fibre optic networks are growing at an incredible rate due to the convergence of voice-only networks with ultra-high-speed data services, the adoption of 5G, the rapid rise in connected devices, growing number of data centres, cable network upgrades and an increasing amount of fibre-to-the-home subscribers. As such, the global fibre optic market is expected to grow at a healthy ~10% CAGR until it hits $12.18 billion by 2020.
 
Industry giants like AT&T, Comcast, Verizon and Google are implementing massive fibre optic initiatives and duking it out for a dominant share of American market, but their efforts are centred on densely populated urban centres, leaving many rural areas out in the cold. This trend is relatively universal in the sector as it just doesn’t make economic sense for these major providers to go outside city limits.
 
That said, it may not be the biggest game in town, but servicing these ignored demographics present an exciting opportunity for small/mid-cap players. Axia NetMedia has been doing just that. Currently the Alberta-based company has fibre networks in Alberta, where it operates the Alberta SuperNet, Massachusetts, and France, through its 50% control of Covage Networks. However to survive and grow, the company needs to spread its wings to grow internationally, but there are some significant issues surrounding that endeavour.
 
Axia operates in a highly aggressive market where companies live and die by the competitive bid process and being able to offer the latest in technologies. The company’s flagship contract, Alberta SuperNet, is set to expire in 2018 and there’s no guarantee that it will be renewed. The same goes for the contracts established through Covage in France, even though they are of a typically longer life with expiries ranging from 2019 to 2040.
 
The fact that it operates internationally also presents challenges on the geopolitical front, the increased costs of doing business remotely, exchange rates, revenue repatriation and having to comply with a wide array of foreign laws.
 
Axia has made a good start, but that’s all that it has done and with what’s happening in Alberta, it had better start diversifying and expanding its operations as soon as possible. Even though it has its fingers in the American pie, I think the company will be hard pressed to significantly grow its US operations. It has to turn its eye to international and emerging markets. That’s going to take money and broader connections. Both of which the company doesn’t have.
 
Partners Group has been successful at growing its investments in small / mid-cap ventures since it was founded in 1996 and has over €42 billion in private equity, private infrastructure, private real estate and private debt assets. In short, the firm has a considerable international punch. Axia can draw on these resources to launch an expansion plan that will ensure its survival and long-term success.
 
Considering what Axia could be, Partners is getting a deal with their bid, but that’s why they’re in business and the reason they’ve managed to remain in business is because they’ve been able to create a string of successful exits for their investors. Without this offer, Axia’s current operations have a limited shelf life and the company has insufficient means to go beyond the instability of a small portfolio. Shareholders should see the opportunity of this offer to ‘exit’ on a high note, instead of hanging on to what could very well be a fading dream.
 
I have no interest in any of the companies mentioned in this article, long or short.
 
--Gaalen Engen
http://twitter.com/gaalenengen
 

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