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THE potential for further consolidation in the internet provider market has narrowed to a handful of companies after Perth-based broadband company iiNet yesterday took out another target in its five-year acquisition strategy. The internet service provider suspended its shares briefly yesterday morning to announce it had paid $40 million for Victorian rival Netspace, ending weeks of speculation about the deal. The purchase cemented iiNet's position as Australia's third largest fixed-line retail broadband provider with 520,000 DSL connections. That places it just ahead of Soul-TPG (442,000) and behind tier-one telcos Optus (980,000) and Telstra (2.24 million).
IiNet recorded a net profit of $14.8m for the half-year to December on revenue of $228.1m. It said it expected the Netspace acquisition to add $70m to its revenue and $8m to earnings in the 2011 financial year. "Our strong balance sheet has placed us in unique position to remain at the forefront of industry consolidation," iiNet chief executive Michael Malone said. "We are committed to delivering on our growth strategy, and Netspace is a logical and sensible acquisition for us."
IiNet regulatory chief Steve Dalby said the company would focus its efforts on absorbing Netspace before seeking new acquisition targets. "There would be other opportunities for acquisitions. We wouldn't talk about who the targets would be at this stage and our focus will be on Netspace now, for the foreseeable future," he said.
IiNet has been an aggressive buyer, having acquired 30 ISPs in the past five years. The larger of those have been its $100m purchase of Ozemail in 2005 and Perth-based Westnet, for $81m, in 2008. It spent the past two years absorbing WestNet before moving on to Netspace. The company has set itself a target of growing its share of the fixed-line broadband market to 15 per cent in preparation for the rollout of the federal government's $43 billion broadband network.
Industry sources said the purchase left only five potential targets left in the residential fixed-line broadband market: privately owned providers Internode, Dodo, Adam Internet and publicly listed entities Exetel and Eftel.
With some 180,000 customers, Internode, whose owner Simon Hackett shares a strong friendship with Mr Malone, has long been the subject of speculation it was an ideal merger candidate for iiNet. Internode chief executive Pat Tapper rejected such suggestions. "We're not for sale. We are having too much fun. If we sold we'd lose our independence and I can't imagine me or Simon or anyone else liking working for anybody else," Mr Tapper said yesterday. The company's "growth story" was a better one than iiNet's, Mr Tapper said.
Adam Internet, which is believed to have about 40,000 fixed-line broadband subscribers, did not rule out accepting an offer. However, managing director Scott Hicks said iiNet had not made any approach about acquiring the company.
Eftel chief executive John Lane conceded that the West Australian ISP would be high on iiNet's list of potential targets, but said a sale was unlikely. The company has between 40,000 and 50,000 residential broadband subscribers and recently invested $10m in its network. However, it is struggling to return to profitability after recording a million-dollar loss in the half to December. "We'd certainly have to be considered an acquisition target but it isn't our aim to be acquired. Our agenda is to make the company profitable," Mr Lane said.
Ovum telecommunications analyst Nigel Pugh declined to comment on whether iiNet would be able to meet its target of taking 15 per cent market share. He said the company's priority was to stop reselling Telstra services and move customers on to its own infrastructure as rapidly as possible. The asset exchange involved in the iiNet deal is believed to be highly complementary, giving iiNet a stronger Melbourne presence and access to an additional five exchanges in Tasmania. "This (acquisition) gives iiNet the opportunity to combine the customer base (and put) more pressure on Telstra to hold on to its fixed-line customers," Mr Pugh said.
Fixed-line revenue has come under increased pressure from growing demand for mobile broadband operators. Telstra reported a 3.3 per cent decline in net profit for the half to December after revenue from its traditional fixed-line services fell 6.9 per cent, or $222m, to $3bn. At the same time mobile broadband has been growing rapidly. As of December Telstra had 1.3 million wireless broadband devices in the market and Optus had about 800,000. Vodafone-Hutchison Australia reported having 673,000 mobile broadband services in operation.
Early this year Seven Group's internet subsidiary, Vividwireless, launched a 4G wireless broadband network in iiNet's heartland, Perth. Mr Dalby said the company would be closely watching how the network developed.
IiNet shares closed yesterday 17c higher at $2.69.
THE battle for Telecom New Zealand's struggling Australian operation, AAPT, was fought among a clutch of telecoms heavyweights. In the end, though, it was a simple bit of give and take that won iiNet the main prize. As revealed in a series of articles in The Australian this week, iiNet propelled itself to the top of the bidding pack for AAPT with a complex deal that included the $60 million acquisition of its consumer arm, a multi-million-dollar extension of a wholesale agreement between the two parties, and most important of all, the sell-down of Telecom NZ's 18.2 per cent stake in iiNet.
The surprise bid by iiNet caught industry observers by surprise, with many expecting rival internet service provider TPG Telecom to walk away with the whole of AAPT's business. But in the end it was iiNet and its willingness to compromise that insiders say clinched the deal for Perth-based ISP. "It's a great result for Telecom. They've sold some key assets in Australia for $140m, assets which they thought they couldn't even give away two years ago," said another source.
While there was never any formal sale process for AAPT, Telecom NZ couldn't stop the flow of interest after chief executive Paul Reynolds described the Australian subsidiary as "non-core" to its mainstream business in April. That sparked a succession of suitors to come knocking on Telecom NZ's doors (rumoured among them were SingTel-owned Optus, Vodafone Hutchison Australia, and the government's NBN Co), but in the end it was a motley crew of five that emerged as the serious contenders. They included TPG Telecom and its acquisition hungry boss David Teoh, small-time telco Amcom, Asian-based telco Pacnet, private equity group Quadrangle and iiNet.
Quadrangle was one of the first bidders in and one of the first to pull out. As a keen player in infrastructure markets, the private equity firm was eager to acquire AAPT's fibre backbone network, but the group had little idea of what to do with the company's ailing consumer division. Both Amcom and Pacnet separately submitted bids for AAPT's prized fibre wholesale network, but neither could muster the funds to make an attractive enough offer.
TPG was the only bidder among the five to make an offer for the whole of AAPT's business — believed to be between $200m and $300m — that Telecom NZ thought might pass muster. Such was the potential of Mr Teoh's initial offer that sources within Telecom NZ felt a negotiated sale was set to emerge. But it never did. "They were the lead bidder by far for the whole business, but they just didn't value it enough. TPG took the position where it thought they were the only one standing and tried to lowball the bid and then they didn't budge," a source close to the deal said.
It was the catalyst that iiNet needed to make its swoop for AAPT's consumer arm, but even then some obstacles remained. Of key concern to the iiNet team was Telecom's 18.2 per cent stake in the ISP, which iiNet managing director Michael Malone feared might one day be gobbled up by rival TPG and used as a launch pad to initiate a takeover at a later date. David Buckingham, iiNet's chief financial officer, made real those concerns yesterday when he told reporters the sale was "unlikely" to have gone ahead without Telecom's exit from the iiNet share register. The sale of Telecom's stake — which Goldman Sachs JBWere sold to institutions for a total of $70m — came with the proviso that iiNet extend its wholesale supply deal with AAPT, to ensure customers continue to flow over AAPT's backhaul network for years to come. The deal now awaits shareholder approval before it is set in stone.
IiNet already has a big job ahead to integrate AAPT's consumer arm and keep the notoriously high-churning customers from moving away, but the company is not concerned. "It's fairly well known that the AAPT business has suffered from declines," Mr Buckingham said. "But we're not worried about that. We think we're paying an absolute steal of a price."
IiNet expects the acquisition will deliver post-synergies earnings before interest, tax, depreciation and amortisation of $20m in first full year after acquisition. The acquisition will see iiNet gain 113,000 broadband subscribers and 251,000 in other services, taking the ISP's total active services to 1.33 million. IiNet expects the takeover to be earnings-per-share accretive from the 2011 financial year.
The acquisition and subsequent sale of Telecom's stake in iiNet had an immediate impact on iiNet's shares, which rose 13c, up 5 per cent, to close at $2.78 yesterday.
End of Report