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Australia's telco sector ripe for consolidation
commentary Consolidation has been talked about as the major theme in the telecommunications sector for so long that few people have taken it seriously.
But tougher economic conditions might well be the trigger for some serious merger and acquisition activity among the second- and third-tier telcos.
Earlier this week Pacnet sent out signals that it was interested in buying AAPT from Telecom New Zealand, a move that many analysts believe would be in the interests of Telecom NZ's shareholders.
If that deal goes ahead, it has the potential to unlock some interesting interlocking shareholdings in Perth. AAPT owns 18 per cent of internet service provider iiNet. Its other major shareholder is Amcom. Futuris has put its 23 per cent holding in Amcom up for sale.
The obvious candidates for consolidation are the 170 internet service providers that are scratching to make a living.
Last week, M2 Telecommunications announced an agreed cash and share swap merger with People Telecom. The deal values People Telecom at up to $16 million.
The scheme of arrangement will create the country's largest reseller with annual revenue of about $250 million. People Telecom shareholders are likely to strongly support the M2 offer because it will be earnings accretive and M2 pays dividends.
M2 and People have managed to carve out businesses that are light on infrastructure and rely on Telstra, Optus and Vodafone for access to networks. Even Telstra has recognised that it can't capture all the potential business that uses its network and that it is in its interests to have a viable reseller strategy.
People Telecom was the first company to resell Telstra's ADSL2+ broadband service. M2 is the largest wholesaler of Optus mobile services to resellers.
The M2 deal with People Telecom involves some long-standing telco personalities. People is controlled by Brendan Fleiter from Crazy John's with 23 per cent, Barry Hamilton with 11.6 per cent, Colin Marland with 15.9 per cent and Ryan O'Hare with 14.8 per cent. They will end up owning about 13 per cent of M2.
The obvious candidates for consolidation are the 170 internet service providers that are scratching to make a living. There has been some rationalisation of this segment but much more is needed. Last year's reverse takeover of SP Telemedia by TPG was a good example of rationalisation in the ISP space. Another example was iiNet's purchase of Westnet.
An ISP that is regarded as a likely candidate for consolidation is Larry Kestelman's Dodo Internet. Another company that is a merger candidate is Optus reseller M8. Other candidates for consolidation in the listed space would have to include the Ehrenfeld family's company Eftel, Macquarie Telecom which has not made a profit for eight years, and small mobile phone company ComTel Corporation.
The recent merger activity such as today's deal between M2 and People Telecom was done without investment bankers, so there may not be a lot of work for professional services firms during the consolidation phase, apart from lawyers.
This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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