iiNet to acquire Internode for $105m

Perth-based ISP iiNet has agreed to acquire privately-held Adelaide-based ISP Internode for $105 million in a deal that creates a broadband powerhouse to challenge the might of Telstra and Optus.

The deal gives iiNet an additional 260,000 active accounts, 190,000 of those being broadband connections. It will also add 36 exchanges to iiNet’s network of DSLAMs, capitalising on Internode's strength in South Australia and on the Eastern seaboard.

Once the deal is done, iiNet will boast 15.5 percent of the fixed broadband market and a total of 900,000 customers, nipping on the heels of Optus.

Under the terms of the deal, Internode founder and majority shareholder Simon Hackett will receive 12 million shares in iiNet, becoming a 7.5 percent owner of the ASX-listed ISP, and has signed an agreement to not attempt to buy further shares in the company for 12 months.

Some of the remaining funding will be used to pay Internode’s debts, the extent of which the parties refused to disclose.

Internode will continue to operate as an independent brand under Hackett’s leadership.

Parallel stories

The deal brings together two of Australia’s challenger ISPs, which have rarely competed for customers but always for awards around customer service.

Both companies were established when their two respective founders, iiNet’s Michael Malone and Internode’s Simon Hackett, were academics. Malone and Hackett have in the past acknowledged a healthy respect for each others’ achievements.

Malone has on several occasions hinted that he would buy Internode if Hackett was prepared to sell. Today he gave an anecdote of an email exchange between the two about a potential acquisition back in 1997.

“We’ve been in conversation about the obvious merits of this marriage off and on for ten years,” Hackett told journalists today.

Both Malone and Hackett said the deal was impacted by the rollout of the National Broadband Network.

Hackett said that while selling his stake in the company was an "enormous mental and emotional step", he acknowledged that in the NBN era, competing will be “all about scale.”

"The size of Internode is right at the bottom edge of what is viable in an NBN world," he said. "It would be a dangerous thing to go into the NBN era being only just big enough.

“If we went the public [listing] route, we would have had the money, but not the scale.”

Hackett arguably set the company up for acquisition when he restructured the company in September, offering redundancy packages to network engineer Mark Newton, CIO Frank Falco, IT systems and network operations centre manager Andrew Walton and peering, commercial and DSLAMs team lead Matthew Moyle-Croft.

Hackett said he did not expect to make any further substantial changes to staffing due to the merger.

Malone told customers on the Whirlpool forum today that Internode customers will soon have access to a range of iiNet products and services including Freezone, BoBsquad and extra fetchtv channels.

Savings

David Buckingham, chief financial officer at iiNet said the company would save $7 million on backhaul, inter-capital transmission, and a consolidation of systems and suppliers.

The two companies both use the same vendor for DSLAMs and VoIP equipment.

Hackett said these synergies in the network "are realistic and mechanically achievable.”

The two companies are yet to discuss whether they would integrate the IT systems of the two entities.

“I would expect in the medium term we wouldn’t be integrating them just yet," Hackett said.

Any integration would be a tough ask for iiNet, which only last month announced it would acquire Canberra-based ISP TransACT for $60m.

Post the Internode acquisition, iiNet will be burdened with around $250 million debt, a level Buckingham said the board was "very comfortable with".

“You work on something all year long, wait for your bus to come and two turn up,” he joked.

The ISPs hoped to complete the transaction by February 29, 2012.