iiNet (ASX:IIN) has received industry and analyst praise over its $40 million purchase of Melbourne-based ISP, Netspace.
According to iiNet CEO, Michael Malone, the deal had been on the books for the past 10 years. He said the conglomerate was aiming at 15 per cent market share of the DSL market and $5m worth of savings within three years.
“We’ve been talking to the guys for over a decade,” he said. “It’s about the right time for them and the right price for both parties.”
Netspace co-directors, Stuart Marburg and Richard Preen, will resign from the company. Malone said it would continue to operate as a satellite division and most of the consolidation was set to take place at a network level.
Malone said earlier media speculation that the deal was set for $75m were important enough to warrant a statement to shareholders, but claimed it had no effect at all on the final price. He also expected no trouble from the Australian Competition and Consumer Commission (ACCC) over competition issues.
“We already had the price agreed upon a couple of months back at a very high level,” he said. “The ACCC has said previously they regard telecommunications as a national market.
“They would just see it takes us from 11.5 to 12.5 per cent. There’s no real change to the landscape.” An ACCC spokesperson confirmed it would not be undertaking any investigations into the deal.
Malone said Optus was iiNet’s key target and claimed the merger would bring the telco within striking distance of being number two in the market. But he added any legislative split of Telstra would not eliminate its dominance.
“We’re now within cooee of Optus in terms of DSL subscribers and we’re growing whereas they decline by 3000 in the last half,” he said. “Telstra’s at 45 per cent, it has $8 billion worth of free cash flow and although they have their internal issues, they have an excellent network and a brand people in the country trust as being reliable and safe.
“No incumbent anywhere in the world has dropped to below 40 per cent market share. It’ll respond and make sure it does retain customers.”
Although an Optus spokesperson confirmed the validity of Malone’s figures, they were keen to point out its total number of broadband customers was at almost 1 million users. Independent telco analyst, Paul Budde, said iiNet’s acquisition of Netspace was a good step forward and would promote strong competition in the broadband market.
“There’s been far too much fragmentation in the competition. If companies combine, especially given issues such as network access, size absolutely matters,” he said. “It will put the competition on their toes and that’s what we’d like to see.
“This will put more pressure on Telstra and Optus than on the second-tier players. Stronger newcomers have more of an affect on the incumbents than on their colleagues.”
Primus Telecom CEO, Ravi Bhatia, shared Budde’s view and strongly congratulated his rivals on sealing the deal. He said the growth was natural and would not damage his company’s prospects.
“Well done to both the CEOs. I think it’s a good price and they haven’t paid over the top,” he said. “It’s a good company they’ve bought – I know both the executives very well.
“I don’t think we ever saw each other as a threat. The market has reached an equilibrium and that is why the growth we see in companies is through organic acquisitions.”
Internode CEO, Patrick Tapper, said he was not surprised at the deal.
“iiNet has completed the integration of Westnet, and has consistently grown by acquisition, so the time was clearly right for another one,” he said in an email to ARN. “This event has no particular significance for Internode.”