iiNet’s evolution after Adam

Telstra's loss is iiNet's gain but with Adam Internet now joining its fold, iiNet is running out of targets and may need to tweak its operations.

Adam Internet didn’t have to wait long to get an interested party to put an offer on the table, with an acquisitive iiNet coming to the party. But with Adam Internet now joining its fold, iiNet is running out of targets and that brings with it its own challenges.

The $60 million deal is perhaps a logical outcome to a process that was essentially kick started by Telstra, which was hoping to derive a less cumbersome route to building a budget brand. However, the Australian Competition and Consumer Commission’s reluctance to green light those ambitions left Telstra contemplating “Plan B” and Adam Internet looking for a new buyer.

While the likes of TPG Telecom and M2 Telecommunications were seen as likely contenders, it’s Michael Malone’s iiNet that has managed to beat them to the punch on Adam Internet and with it made a significant addition to its broadband customer base (now in excess of 900,000 subscribers).

The tie-up faces no regulatory hurdles, the ACCC has already cleared the way for the transaction, and in this case iiNet’s familiarity with its target could explain why Malone had little trouble in matching Telstra’s $60 million offer. iiNet was been engaged with Adam Internet for quite some time now and has a solid idea of the value it brings to iiNet’s burgeoning roster of acquisitions, which includes Internode, Westnet, and rival AAPT’s consumer arm.

According to Malone, calling Adam Internet a budget brand is doing the outfit a disservice.

“Telstra was referring to Adam as its low cost brand but Adam isn’t Jetstar. They actually run excellent service levels the only reason that doesn’t show up is because the AC Nielsen polls and so on are all done on a national (not regional) basis,” Malone said.

Adam Internet, with its solid footprint in South Australia and Northern Territory, just doesn’t get the credit it deserves but should fit seamlessly into iiNet’s playbook, especially as traditional telephony revenues evaporate in a couple of years. Consolidation has been the name of the game in the ISP space and with Internode and Adam Internet now under one banner iiNet becomes a formidable player in South Australia. However, with potential targets now drying up, where does iiNet go from here?

From an analyst perspective, the next phase of iiNet’s strategy should involve shifting focus to cost control and efficiencies.

Ovum’s David Kennedy says that in terms of mass consumer markets bigger is always better and iiNet burgeoning scale is already delivering benefits.  

“They are enlarging their customer base, (which is a good thing) but they are running out of targets as well,” Kennedy says.

The benefits of scale are already apparent for iiNet. Its market cap is above $990 million, the stock has almost doubled over the past 12 months, from $3.40 in early August 2012 to over $6.13, and independent telco analyst Chris Coughlan says that iiNet is likely to start digging deeper to drive productivity and efficiency.

“That means integrating all the businesses into one back engine room, one billing system, and at the same time drive organic growth,” Coughlan says.

Essentially, that means getting the wheels to start spinning faster behind the scenes and maximise the opportunity provided by the national broadband network (NBN). At some point customers have to move across to the NBN and that provides an opportunity to churn some customers.

Malone is certainly cognisant of the steps that need to be taken. iiNet has a presence in the mobile space, with 130,000 customers, and the B2B space is heating up with about $200 million of revenue is rolling in.

Identifying cost savings and efficiencies is also very much on the agenda for Malone, who points out that both the Internode and the TransACT deal were pursued with a clear eye on delivering savings.

“We identified over $8 million of savings in the Internode deal, we are clearly working on this and it’s an area where we know we need to do better, even with TransACT (a relatively small business) we identified over $3 million of savings there,” he says.

As for the NBN, iiNet is currently running at over 20 per cent market share, albeit in very small numbers, but the company is well and truly batting above its average. Its overall market share is around 14 per cent and Malone says that the real opportunity for iiNet is in regional Australia.

The NBN equation will start to play out a bit more actively for iiNet once the network is rolled out sufficiently and while the Coalition’s fibre to the node (FTTN) policy is less than ideal for technologists, including Malone, a faster rollout is better for iiNet’s bottom line.

For now, iiNet will no doubt get cracking on bedding Adam Internet into its fold but acquisitions won’t entirely be on the back burner. In fact, Sydney-based ISP Exetel – with its price-sensitive, low cost model – could potentially be the next target in a rapidly consolidating ISP space. TPG, M2 and maybe iiNet could all potentially be running that race in the not too distant future. 

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