TPG to acquire iiNet

Massive shakeup for Australia's telco landscape as TPG moves to acquire ISP in a transaction valuing iiNet at $1.4 billion

TPG has announced that it will move to acquire iiNet.

The company announced this morning in a statement issued to the ASX that it would move to acquire the shares in iiNet that it does not already own. Currently TPG owns 6.25 per cent of the ISP.

TPG will pay $8.60 per iiNet share, pegging the value of the transaction at approximately $1.4 billion.

The acquisition will boost TPG's broadband customer base to more than 1.7 million and "delivers scale benefits in an NBN environment," a TPG investor presentation said.

TPG has a "leading value-based offering" while iiNet "offers a more premium, customer service-led offering with award winning products and servcies," the presentation said.

iiNet has 975,000 broadband customers including 60,000 NBN customers. The ISP has more than 2500 staff.

iiNet added 25,000 new fixed-line broadband customers for the six months ending December 31, 2014, the company revealed in February its half-year results announcement.

The ISP reported an 11 per cent increase in revenue to $547 million and net profit after tax of $32 million for the first half of FY15.

The acquisition by TPG has received the unanimous support of iiNet's directors.

"iiNet and TPG are highly complementary businesses in terms of geographic presence, market segments and corporate customer base," TPG CEO David Teoh said in a statement.

"The board views this as a significant reward for shareholders who have shown their faith in iiNet," iiNet chairperson Michael Smith said in a statement.

"The price of $1.4 billion is a very tangible measure of the value that the extraordinary people of iiNet have created through their innovation, brilliant service and capacity to add value."

The companies have pro forma combined revenues of $2.3 billion and EBITDA of $654 million, TPG's presentation said.

iiNet shareholders are expected to vote on the acquisition in June.

The acquisition will be subject to regulatory approval.

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Paul Budde of BuddeCom said consolidation in the telecommunications market is "unavoidable" and while the announcement was surprising in a broader sense the move itself was not.

"The market is heavily commoditised and this will only continue," Budde said.

"Obviously this process has consequences for competition in the markets, and the merger is therefore a sad story for completion. We are seeing more and more industry concentration and that is not good for the future of competition.

"However, as the telco market in general has failed to diversify (move more into value-added services) consolidation is unavoidable."

"It's a nice deal for shareholders, the debt and financing is not a risk, and it will be a larger business," said IBRS advisor Guy Cranswick.

"What consolidation will mean to operations is another issue, not that this will affect service. With the concentration, other operators will have a few things to ponder."

"Removal of one player, though it seems the brand will still exist, is not automatically a loss of competition, which should not be adversely affected," Cranswick sad.

"Financially iiNet looks more substantial than TPG in terms of stock price, EPS and yield, but TPG have been viewed positively for a while," Cranswick said.

Some ISP consolidation is not necessarily bad per se, he added.

"The potential negative effects of consolidation are monitored by the ACCC [Australian Competition and Consumer Commission] hence consumer protections are upheld."

"Some smaller players may close or seek to become larger through mergers" in the wake of the acquisition, Cranswick said.

"The scale of their businesses will come under greater scrutiny when the concentration is now within three large entities. For those with shareholders, there ought to be review of performance and business strategy with a modified number of competitors."

"The proposal does represent excellent value for existing iiNet shareholders," said independent telco analyst, Chris Coughlan

"This elevates a combined TPG and iiNet to second position in the fixed market, relegating Optus to third position. I think the ACCC will need to consider the impact on market competition of this transaction — combining these two significant entities.

"From an asset perspective the iiNet HFC assets in regional areas may be of interest to TPG as they continue to look to compete with NBN Co in access. However the positioning of iiNet and TPG are very different; iiNet is about customer service and value with low contention in their network, TPG is about price rather than service.

"So I expect they will continue with the two brands for some time, if the transaction goes through. Optus is more likely to feel the competition brunt, it has had level performance, while both iiNet and TPG have experienced good growth, which could accelerate.

"I suspect that any market response to the merger will likely come from Optus, especially now that Alan Lew is steering a more invigorated Optus helm. By utilising the 2.3GHz spectrum for fixed access products they could effectively compete and potentially earn higher margins than with NBN Co access."

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