Tough questions remain for Vocus Group following the conditional $3.3 billion takeover proposal from a US private equity firm, as analysts consider the sprawling telco's potential to be broken up.
Kohlberg Kravis Roberts' $3.50 cash per share proposal for the telecommunications provider on Wednesday is preliminary and non-binding, with KKR assuming Vocus' $1.1 billion debt.
According to Citi, the offer remains subject to shareholder and regulatory approval, including a visit to the Foreign Investment Review Board; due diligence and a unanimous Board recommendation.
Vocus, meanwhile, must also meet its full-year guidance for earnings to be above $365 million.
While the junior telco's share price gained almost 22 per cent on Wednesday as the market digested the offer, Vocus has taken a pummelling since August 2016, shedding almost 70 per cent of its value.
Management has grappled with a rush to expand that began in December, 2014 with the $1.2 billion Amcom merger, a $3.8 billion merger with M2 Group and October's $807 million acquisition of Nextgen.
Through its Commander, Dodo and iPrimus brands, Vocus provides telco, data, cloud and energy services to consumers and businesses in Australia.
According to Citi analyst David Kaynes, hard questions remain for both parties considering current valuations and the conditional nature of the preliminary offer.
"In our view the key risk to this bid is the assumption around the earnings performance and debt levels," Mr Kaynes said in a note to clients.
Mr Kaynes said the current numbers were drawn from Vocus's latest guidance.
Given the magnitude of its last downgrade and the uncertainty caused by falling revenue, rising costs and limited financial data, Citi considers current these estimates not to be without some risk.
"Given the highly conditional nature of the preliminary offer, we think this is unlikely to be sufficient for Vocus to grant due diligence," Mr Kaynes said.
Mr Kaynes said a bidder could see potential to break up the company, separating out the New Zealand and Australian consumer businesses, which account for 20 per cent and 47 per cent of revenue respectively.
Vocus has an investor day on the 14th of June.
