NEW YORK (The Deal) -- Australian broadband provider iiNet on Wednesday, May 6, recommended shareholders accept a sweetened A$1.56 billion ($1.24 billion) takeover proposal from TPG Telecom that matches a rival cash-and-stock bid from M2 Group, because it offers investors the option to take cash for their iiNet holdings.

TPG said it would pay iiNet shareholders A$9.55 for their iiNet shares including either A$8.80 in cash or 0.969 of its own shares as well as a A$0.75 dividend for each iiNet share. TPG said it would limit the number of shares it would issue for the purchase to 27.5 million and would adjust the offer if too many iiNet investors opted for stock.

"The certain value of cash under the revised TPG offer is preferable on a risk-adjusted basis to the inherently uncertain future value of a combined iiNet and M2 under the M2 proposal. The returns to iiNet shareholders under the M2 proposal would ultimately depend on successful integration of the two businesses and capturing of synergy benefits, as well as the continued trading performance of both businesses," iiNet said.

ISPs are rushing to bulk up as the Australian government completes its purchase of the national fixed-line network, valued at A$11 billion, of market leader and former monopoly telecom Telstra to spur competition and ensure fast Internet. If TPG's bid proves successful, it would create the No. 2 broadband services company with about 1.7 million customers, still a ways behind the 3 million at Telstra's Big Pond Internet division.

But the bidding may not yet be over. All eyes are on M2, which was mum following the sweetened offer, and analysts have said the current No. 2, Singapore Telecommunications, may also pony up a competing iiNet bid to maintain its position -- it has just under 1 million Web customers.

TPG was forced to approach iiNet with a new offer after the target's board last week decided to back M2's approach -- TPG had three days to match or better any competing offers after kicking off the bidding war with a March 13 agreed bid at A$1.4 billion.

iiNet shares closed 2.8%, or A$0.28, lower at $A9.72, slightly above the current offer, while TPG ended the day 4.2% higher, or A$0.37, at A$9.16. TPG's higher price values the offer at A$9.62 per iiNet share for investors that would accept the share component.

M2 slid just A$0.01 to A$11.10.

Goldman Sachs  (GS) is financial adviser to M2, with Allens' Mark Malinas and Richard Spurio providing counsel. Macquarie Capital's (Australia) Darren Keogh and Glen Butler are acting as financial adviser to TPG Telecom, with Costas Condoleon, Katrina Groshinski and John Mosley from Minter Ellison providing counsel. iiNet is relying on Azure Capital's David Flynn and Geoff Rasmussen for financial advice, with K&L Gates' Simon Salter and Betsy-Ann Howe handling legal details.

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