iiNet buys Netspace (updated)

Bolsters Victorian and Tasmanian presence in deal of a decade

iiNet (ASX: IIN) will shore up business in Victoria and Tasmania, announcing it will buy fellow internet service provider, Netspace.

iiNet chief executive officer, Michael Malone, said the company had entered into a binding agreement to acquire Netspace for $40 million as part of the provider’s strategy to increase market share to 15 per cent.

“We have been talking to Netspace for something over a decade,” he told journalists during a conference call. “We always thought it was a good idea to bring the businesses together.”

The companies share a similar history and philosophy, he said, but until recently the sticking point had always come down to the price iiNet was willing to pay. In the end, however, Netspace’s footprint in Victoria and Tasmania proved too tempting.

“The weakest areas for iiNet nationally are Melbourne and Tasmania and Netspace is complementary there,” Malone said.

iiNet has only one DSLAM in Tasmania — in Hobart. The buyout brings that figure up to 12 exchanges across the state.

The announcement ends six months of formal negotiations between the parties.

Netspace owners, Stuart Marburg and Richard Preen, have in recent times stepped back from the day-to-day running of the business. They are planning to resign from their roles prior to the completion of the acquisition, Malone said.

“In this case they were in a place in their lives where it made sense to them,” he said. “And they have done a lot to build much more robust business than more than 10 years ago."

“The guys have invested in the business and grown it in a way that certainly makes it more attractive,” he added.

In a statement to the ASX, iiNet reported the acquisition was consistent with its strategy to grow through consolidation, lifting the company’s market share to 12.4 per cent, increasing broadband customers by more than 70,000 to over 520,000. The buyout is being funded entirely by debt, leaving iiNet with $57 million in net debt.

“At $57 million I’d say we’re still conservatively geared,” Malone said.

For the moment, the two brands will continue to operate as separate entities but iiNet expects to realise significant potential savings through the migration of Netspace customers to iiNet’s network and through lower bandwidth costs — potentially $2 million in the first year and $5 million in the second year of iiNet’s ownership.

Malone said Netspace staff would become part of the iiNet business; the Netspace office in Melbourne would provide iiNet with a Victorian office under the direction of Netspace chief operating officer, Peter Eley, who is running the business on a day-to-day basis. Netspace’s call centre is also headed up by former iiNet employees.

“Staff often move in both directions between the businesess because the companies have similar cultures and operate in the same space,” he said. “It does give us a deal of confidence.”

iiNet will remain a predominantly retail player, but with the National Broadband Network planning underway, the ISP will look at access to content and value added services.

“Owning the link to the home is very important but, then, what else do people do with that link? Happily I think we have a couple of years of good organic growth but what do we do next? In two to three-years time, having scale is going to be vital.”

Malone said he expected to see between three and five large market players in the future and it would become increasingly difficult to operate as a small ISP.

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