I have one question for someone that understands the numbers:
Article says JP Morgan values Vodafone AU at $7.4B, but says the debt is $8.6B - does this mean that Vodafone AU is worth zero (can't be $16B gross) or more importantly will these guys potentially swap their debt for equity in the new combined entity and leave the minor shareholders with nothing? Why would they bother sharing money with shareholders?
There is no doubting the strategic rationale for Vodafone and TPG Telecom's proposed $15 billion merger.
The hard part is how to go about it.
There are big fish on both sides, a hellish pile of debt and plenty at stake for both companies.
But as the talks heat up, it is slowly becoming clearer what is being discussed.
Street Talk understands the mooted merger of equals would be done via a scrip-based deal at a nil premium.
TPG would buy Vodafone Australia in return for a big pile of new shares, and the combined entity would trade on the Australian Securities Exchange.
The proposed deal would be done without TPG raising fresh equity or selling assets.
And to work, it is understood the companies want to be about the same size on entry to help create a true merger of equals and some debt would need to vanish. Quickly.
As is stands, TPG is worth $8.6 billion on an enterprise value basis - thanks to a recent run in its share price which may have to be overlooked - while Vodafone is worth $7.4 billion on JPMorgan's numbers.
Vodafone's problem is its giant debt stack worth $8.4 billion and mostly payable to its two big shareholders; British giant Vodafone Group and Hong Kong's CK Hutchison, part of the Cheung Kong group of companies controlled by Li Ka-Shing.
Vodafone's two shareholders would absolve a big chunk of that debt as part of the deal being discussed.
The two companies' respective shareholders would be expected to split the new company 50/50.
The new TPG's two biggest shareholders would be Vodafone Group and CK Hutchison, followed by TPG stalwarts David Teoh, the company founder, and his long-time backer, the Millner family's Soul Patts.
The free float is expected to account for only about 20 per cent of the combined group - which would still be about $2 billion or so of shares available to trade.
The combined group would likely have $6.2 billion revenue and $2.11 billion EBITDA in the 2019 financial year, according to JPMorgan analysts who took a close look at the situation on Tuesday, increasing to $6.4 billion and $2.12 billion in 2020.
The secret sauce is the expected synergies, which JPMorgan reckons would be worth $3.8 billion if the whole company was valued at 8-times EBITDA.
There are plenty of moving parts - and some renowned negotiators on both sides of the deal. But the two companies believe the stars may have aligned and seem motivated to progress the talks.
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