Shares in CityFibre (LSE: CITY), a provider of wholesale full fibre infrastructure in the UK, increased by 90% on Tuesday after it became the subject of a bid approach. The company’s board has agreed the terms of a cash acquisition by Bidco. It consists of 81p per share in cash, which is a 92.9% premium to the closing price of the company on the working day prior to the offer being announced.
Could this be the start of further acquisition activity in the telecoms sector? As a result, could a FTSE 250 sector peer be worth a closer look?
A done deal?
But first, CityFibre. The board is recommending that shareholders accept the deal. Already Bidco has irrevocable undertakings and a letter of intent from 67.8% of shareholders in the company. As such, the chances of it being concluded seem to be relatively high, and it would represent an all-time high valuation for the business. As such, the prospect of investors who are set to make a profit from the deal deciding to vote against it seems relatively low.
Alongside news of the bid approach, CityFibre also released its full-year results. They showed a rise in revenue of 126%, while gross profit moved 48.4% higher. During the period, it was able to deliver on a £201.8m fundraising which is being used to fund growth of the company’s full fibre network and to pay for the acquisition of Entanet.
However, the company’s net loss increased to £16.6m from £12.6m in the previous year. This shows that while it has the potential to become a highly profitable business in the long run, in the near term it may struggle to deliver a financially-appealing outlook. As such, the acquisition approach seems to be good news for the company’s investors.
Further bid activity?
Also operating within the telecoms sector is FTSE 250-listed Talktalk (LSE: TALK). The company has experienced a difficult period which has had a negative impact on its financial performance. However, it now seems to have found the right strategy under a refreshed leadership team, with the company’s bottom line forecast to rise by 62% in the current year and by a further 20% next year.
Despite such a strong rate of growth, Talktalk trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it could offer growth at a reasonable price. And since dividends per share are expected to increase by 78% next year, it appears as though the company is optimistic about its investment outlook.
Certainly, the UK quad-play sector is becoming increasingly crowded and remains highly competitive. But with a strong position and the potential for further growth due to its focus on efficiency and customer service, it would be unsurprising for the company to become a takeover target over the medium term.
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Peter Stephens owns shares of TalkTalk Telecom Group plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.