Industry laments loss of Pipe Networks

Pipe Networks' chief, Bevan Slattery, may have found his "cash-out" door from the company that helped internet service providers snub Telstra, but many of those customers are not happy that a direct competitor could now control it.

"This will be a disaster for the industry. Because, for roughly 50 per cent of DSLAM exchanges, Pipe is the only alternative to Telstra," said the boss of one of Pipe Networks' ISP customers who wished to remain unnamed. "In the type of services ISPs need and Pipe provide, they are the only game in town. This will be a major problem for the industry. It's terrible."

Boss of a smaller client, Exetel, John Linton said he would take his $40,000 per month spend with Pipe elsewhere if it's merged with TPG parent, SP Telemdia. He said he wasn't criticising the way SP Telemedia boss, David Teoh, runs the ISP but, "Why would we do business with TPG?" asked Linton.

Linton's comments were in stark contrast to iiNet boss, Michal Malone, arguably Pipe's largest customer, who yesterday said the proposed sale to SP Telemedia was not a supply concern. "We all buy stuff from each other anyway," said Malone. Still, highlighting the sentimental status of Pipe to the industry, Malone added that Pipe's two co-founders Steven Baxter and Bevan Slattery had "changed the landscape of Australian telecommunications forever".

Chief of mid-size ISP Netspace Stuart Marburg said there were worse outcomes than what's been proposed. "I don't think anyone would be happy, but at least it's not Telstra buying them," he said.

"I think the main concern is that [TPG] will get preferential pricing ... but you can't do much about it," said Marburg. He congratulated Baxter and Slattery for "setting up a great company and getting a good return on that".

But few of the ISP executives who ZDNet.com.au interviewed for this story were surprised by Slattery or Baxter's decision to sell. One source close to Slattery called him a "serial entrepreneur" while two other directors from separate ISPs said Slattery had been looking for an "exit strategy" for the past year.

"This looks like the latest round in Bevan and Steve's exit strategy," one said, but noted that the four-month horizon before a decision is approved gave ample time for a preferable entity to place a bid for Pipe Networks — the NBN Company.

According to this source, Pipe's metropolitan fibre network, which the likes of iiNet, Internode, Netspace, iPrimus and others heavily rely on for connectivity to phone exchanges for the provision of ADSL broadband services, reaches about 80 per cent of Australia's population, which made it an attractive option for the NBN Co.

Boss of iPrimus, Ravi Bahtia agreed. "The NBN Co should buy it because Pipe has what the NBN Co needs — backbone transmission. The NBN Co will need a grid, and will be a wholesale provider of connectivity, and this would play a role in that."

But Southern Cross analyst, Daniel Blair, said the National Broadband Network plans were not clear yet, and that there was a chance Pipe's fibre network won't reach the right places. "How does this change under an NBN? At the moment, you have 5000 phone exchanges in Australia. Under a copper architecture, exchanges are about every 1.5 kilometres apart. From what we know, with GPON (the core technology planned for the NBN) you can go up to 20km from a home, so many of those exchanges are not required and could be bypassed completely."

Shareholders though, were not happy about the $6.30 offer made by SP Telemedia. David Hall, an owner of Pipe shares said although shares were trading at a fairly high multiple, there wasn't a takeover premium. "It's quite clear that Pipe will represent quite a large portion of their profit going forward," said Hall.

Yesterday, SP Telemedia issued a 2010 guidance outlining that its $470 million annual revenue would amount to $47 million in net after tax profit, while Pipe's $98 million revenue would deliver a profit of $25 million, roughly a third of the merged entity's expected profit.

Both Netspace's Marburg, also a shareholder in Pipe, and Southern Cross' Blair agreed with Hall.

"The consensus valuation for Pipe is about $6.80 so [the $6.30 bid] is in the ball park, but there's no premium," said Blair.