iiNet's Christmas shopping spree

It was always on the cards, but iiNet's move to snap up Internode three days before Christmas caught almost everyone on the hop. The Perth-based internet service provider's interest in adding Internode to its fold was never in doubt but there was a question mark over whether Internode boss Simon Hackett was ever going to acquiesce to a deal.

That question was answered yesterday when iiNet boss Mike Malone shook hands with Hackett on a $105 million deal that will see Internode become part of Malone's sprawling ISP empire. The deal, a combination of cash and scrip, will let iiNet add 190,000 subscribers to its customer base and 260,000 active services. It will also see Hackett receive a placement of 12 million shares, adding up to a 7.5 per cent stake, in iiNet. The acquisition is expected to boost iiNet's fiscal 2012 revenue by about $180 million and will be completed by February 29.

With the pertinent numbers out of the way, let's take a look at what the marriage between iiNet-Internode means for the local ISP market.

Catching up to Optus

This is iiNet's biggest purchase in the last 18 months and in that time Malone has paid $60 million for TransACT, another $60 million for AAPT's consumer customer base and $40 million for Victoria-based Netspace. Consolidation is the name of the game in the local market and it's a principle that iiNet has taken close to its heart. Internode was the jewel in the crown long coveted by Malone, and there's been talk an unsuccessful overture was made last year. However, this time Malone has managed to get the tick from Hackett and with it, set itself up to have a go at wresting Optus' position as the second-largest ISP in Australia. Optus will have a good reason to get a bit hot under the collar because the numbers are adding up on iiNet's side.

Once the Internode deal is done and dusted next year, iiNet will have close to a 15.5 per cent share of the broadband market with 900,000 or so subscribers. That's mighty close to Optus' base of one million broadband customers; and I won't be too surprised if Malone follows up this victory with a go at the other South Australian ISP, Adam Internet, next year. In fact, the likes of Primus, Dodo and Exetel are all on the radar, now that Internode has been snapped up.

The other consideration for Malone is that the move provides a buffer against a future assault by its shareholder TPG, which holds a 7.24 per cent stake. Hackett is sticking around with his 7.5 per cent stake for twelve months after the acquisition is completed, and could prove to be a handy ally if TPG decides to up the ante next year. There are suggestions that Hackett may end up with a seat at iiNet's board but I am not so sure that's going to work given that he will continue to run the show at Internode and there'd a good chance that he could cash out once the 12 months are over.

NBN the game changer

It wasn't that long ago that Hackett revived the idea of the telco going public. The last time the idea was floated was in 2010 and in September, Hackett hinted that a potential change of power in Canberra could be the trigger for an IPO. The fact that Hackett, a long standing critic of the NBN's pricing policy, has now decided to join iiNet tells you a few things. Firstly, both ISPs are now sanguine that the NBN is here to stay, with or without a Coalition win in the next election, and the best way to stay afloat in the post-NBN environment is to stick together and grow bigger.

It's a point both Hackett and Malone stressed yesterday, saying that the rollout of the NBN leaves no room for smaller ISPs to compete.

Hackett has railed against NBN Co's pricing model, especially for quite some time and in March said in no uncertain terms, that the model was only be feasible for ISPs with customer bases in excess of 250,000 customers. Internode was just about hovering around that mark, but obviously Hackett has decided against diving into the post-NBN world without adequate scale.

The news won't be universally applauded by Internode's customers, many of who prefer Internode's innovative and proactive business model to iiNet's corporate modus operandi. That may be why Malone is letting Internode trade as a separate business unit and hoping that the continued presence of Hackett as managing director will keep the backlash to a minimum.