iiNet to buy Westnet for $81 million

ASX-listed ISP iiNet is to buy fellow West Australian service provider Westnet for AU$81 million in cash.

The acquisition will bring iiNet closer, in subscriber terms, to Australia's top two ISPs: the combined entity will boast a total of 685,000 subscribers, 365,000 of whom are on DSL. At last count, Telstra counts around 2.5 million Internet subscribers, while Optus counts close to one million.

Privately owned Westnet is currently the nation's sixth largest ISP — employing 560 staff, with 180,000 Internet subscribers, 31,000 telephony customers and 11,000 Web hosting customers. Over half of its revenues are derived from the resale of wholesale ADSL broadband connections provisioned by Telstra and Optus. The company is expecting FY08 revenues of AU$133.6 million, a growth of 32 percent over FY07, and is expecting to post its first net profit after tax of AU$7 million after several years of minor losses.

iiNet chief executive officer Michael Malone said: "Westnet has consistently set the benchmark for service in our industry, and I look forward to learning how we can improve iiNet's service even further."

Malone said that iiNet will retain the Westnet brand and staff.

"This acquisition is very different to when we acquired Ozemail," he told ZDNet.com.au. "Ozemail, as a brand, not only competed with ours but it also hadn't grown in four years. We were outselling Ozemail in Sydney by six to one. It didn't make sense for us to keep their brand. That acquisition was really about adding to our network of DSLAMs on the East Coast."

"With Westnet, by contrast, our combined market share in Western Australia [30 per cent] is such that I don't see us competing with each other," he said. "Outside of WA, it's a question of support. Westnet is a strong regional brand, iiNet is a strong metropolitan brand. With an iiNet customer, you can support them from a lot of places — we have call centres in Sydney, Auckland, Perth and a new one in Capetown. But Westnet's regional subscribers are less likely to see that as acceptable. They would demand local support. There is a unique culture and sales capability at Westnet and it needs to be preserved."

Malone said he isn't tempted to centralise the administration of both ISPs to save on costs.

"As much as I'd love to, mate, sacking accountants don't save me money," he joked. "The savings are on the network. Contracts with Telstra Wholesale will be maintained by the Westnet entity. Westnet will merely change its wholesale agreements with Telstra to iiNet wherever it is sensible."

There will be opportunities for the two brands to cross sell each other's products — Westnet may offer iiNet's naked DSL products, and iiNet may offer Westnet's satellite services to any of its own customers that can't gain access to ADSL.

Funding the acquisition has been a mammoth exercise. Malone said he had only pulled together the underwriting agreement for the funding on the morning the acquistition was announced.

The money is being raised on several fronts — half via a AU$41 million share placement of 25.6 million shares at AU$1.60 per share, brokered by Euroz Securities Ltd, the rest in cash and debt.

Both of iiNet's two major shareholders, Amcom Telecom and AAPT, support the move. Amcom has raised AU$6 million via the placement of 30 million shares at 20 cents per share, its parent company Futuris Corporation has also contributed AU$3 million.

"Both [Amcom and AAPT] are taking up their pro rata entitlement," said Malone. "They will still have the same shareholding in the company."

Malone has sacrificed his own shareholding however — down from 19.5 percent down to 16 percent. "Mostly because I didn't have a lazy eight million lying around," he said.

The acquisition comes at a time of continuing consolidation among ISPs. In February, listed ISP SP Telemedia (trading as Soul) forked out AU$150 million for a merger with TPG.

"We have to acquire," says Malone. "I think we're still sub-scale, even after this deal. On a national basis [outside of WA], we're still not at the scale we'll need to be in three to five years."

Malone said iiNet could comfortably continue to grow its earnings and profits over the next two years as the remainder of the population that isn't on broadband jumps on board. "But once that two years is up, there will be no more growth in the market for new connections and we'll only be fighting everyone else for market share," he said. "That's when ISPs will need to look at value-added services and content as a means of differentiation."

"Content require scales — it is about licensing, and you can only make that licensing worthwhile if you have your costs spread over as many customers as possible."