iiNet's board has today given TPG an opportunity to raise its $1.4 billion bid for the company to either match or better rival M2's $1.6 billion offer.
The deal would see iiNet shareholders receive 0.803 of an M2 share per iiNet share and a 75c special dividend.
The final valuation is based on M2's share price at the time the proposal is accepted. Based on M2's closing price yesterday, the company's offer for iiNet now values the ISP at around $1.56 billion, compared to the $1.6 billion valuation based on its share price when it made the offer on Monday.
TPG's offer included a provision under the pair's scheme implementation agreement that iiNet notify TPG if it deems any competing proposal to be a better deal.
iiNet's board today said it had completed due diligence enquiries on M2's offer and had issued a relevant notice to TPG, triggering its matching rights.
It said it would hold off on making a recommendation to shareholders until TPG had submitted its competing bid.
"We have to recognise that evaluating the M2 and TPG offers requires careful analysis given TPG is offering cash and M2 is offering shares in a significantly enlarged telecoms company," iiNet chairman Michael Smith said in a statement.
"Once we know [TPG's] position, we will provide a recommendation to shareholders as to which proposal we believe they should support."
M2 has advised that should the two parties not enter their own scheme implementation agreement by 5pm Wednesday next week, it would withdraw its offer.
The M2 proposal took into account issues shareholders and board members had expressed with the TPG offer, namely around the all-cash nature of the deal and TPG's future handling of the business.
M2 promised to operate iiNet as a standalone brand and maintain its focus on customer service and advocacy. It also said it would appoint two iiNet directors to its board to give the business a stronger voice in the group.
TPG now has three business days - or until 5pm next Tuesday - to make a counter offer.
Its first bid received an unfavourable response from a number of shareholders and investors - including founder and former CEO Michael Malone - who have criticised the board for a lack of communication and urged it to test the market for a better bid.
Malone this week publicly backed the M2 bid based on the share-swap nature of the offer as well as the similarities and synergies between the two companies.