An expensive battle for second place is underway in Australia's booming telecommunications sector, with Dodo owner M2 Group attempting to scuttle TPG Telecom's planned takeover of iiNet.
M2 has put forward a $1.6 billion takeover offer for iiNet, beating the $1.4 billion offer from TPG that iiNet's board of directors had previously urged shareholders to accept.
The move is likely to kick off a bidding war, with the victor claiming the mantle of Australia's second-largest fixed line internet provider behind Telstra.
And then there's the possibility that Optus, the current second placed provider, will put forward a bid of its own.
"Optus is currently the second biggest player and I expect would be immediately running the numbers on whether a bid for iiNet could work," Rivkin local investment director Shannon Rivkin said.
The new bid would be welcome news to iiNet founder Michael Malone, who in March called for the company's board of directors to be sacked for recommending the TPG deal, which he said undervalued the company.
Other iiNet shareholders were also critical of the deal.
M2 chief executive Geoff Horth said the company had specifically designed its bid to address those concerns.
M2 is offering the equivalent of $9.25 worth of its stock (based on its recent share price) for every iiNet share the takeover target's investors own, plus a special dividend of 75 cents.
Mr Horth would allow iiNet shareholders, which would end up owning 42 per cent of M2, to benefit from synergies created by the merger and, unlike TPG's all-cash offer, wouldn't leave them with a capital gains tax bill.
"Our offer clearly seeks to proactively address some of the concerns addressed by the iiNet shareholders," he said.
"It's not by chance that our offer has a majority scrip component, reflecting the iiNet's shareholders' concerns regarding CGT rollover and the ability to share in the benefit of the larger business and the synergies extracted."
M2, which owns a string of internet providers including Dodo, iPrimus and Commander, plans to retain iiNet as a standalone brand, which is a similar to the strategy put forward by TPG through its bid.
In a statement, iiNet said it was considering whether M2's proposal was superior to TPG's and continued to recommend the later bid to shareholders.
If it decides to back the M2 bid, TPG will have three business days to put forward a matching offer, under the scheme of arrangement between the companies.
"Whilst we will now need to spend some time working through the process, we are confident that the final result will have positive implications for shareholder value," iiNet chairman Michael Smith said.
Shares in iiNet surged by $1.14, or 13.2 per cent to a record high of $9.80, while M2 fell 62 cents, or 5.4 per cent to $10.90 and TPG lost 59 cents, or 6.1 per cent, to $9.01.
* The reporter owns shares in M2 Group.
