SA's Internode bought for $105m by WA company iiNet

[ghs]

TWENTY years ago Simon Hackett started a firm to build "little bits of hardware that did things on networks".
Mr Hackett yesterday sold Adelaide-based Internode for $105 million, earning himself a $31.8 million personal payday.

The sale to Perth-based broadband provider iiNet came 14 years after its chief executive, Michael Malone, emailed Mr Hackett saying: "If there is ever a time when you want to get out, call me." That conversation continued over the years, but the answer was always "No, not yet".

The rollout of the national broadband network convinced Mr Hackett the time was now right to turn his 20 years as head of Internode into a 7.5 per cent stake in iiNet. That stake was valued at $31.8 million yesterday.

Both companies said no jobs would be lost in the short term and it was "business as usual" - meaning future job losses were not ruled out if it made sense to the combined business.

The transaction leaves Adam Internet as the sole SA-owned internet service provider of note.

Both iiNet and Internode - which has 190,000 broadband customers - have committed to keeping the brand alive in the company's existing Adelaide structure.

Mr Hackett said consolidation in the industry meant the deal was necessary for the viability of the Internode brand.

"We have been having conversations about this deal for more than 10 years and it finally reached a stage where it made sense," he said. "With the national broadband network, it is about scale. Internode is right at the bottom edge of what we think is viable (as part of the NBN).

"If you are small, the economics don't stack up.

"Now we end up being three or four times as large (so) this is the right thing to do for the business."

Internode operates a CBD fibre network in Adelaide, along with VoIP (internet voice calling), mobile data and some regional wireless services and was in the process of restructuring.

Senior management including chief executive Patrick Tapper, corporate affairs manager John Lindsay and chief financial officer Sean Habgood have been allocated shares within the company, although their combined 100 "B" shares are heavily swamped by Mr Hackett's holdings.

iiNet's purchase puts an end to ongoing rumours that Internode was looking to list on the Australian Securities Exchange in its own right. Its success fuelled its expansion throughout Tasmania and the east coast but created financial pressures to fund that expansion.

The deal that was announced yesterday will give the company its needed funding while committing to running the company under its existing structure as part of a larger company. iiNet chief executive Michael Malone said Internode's strong local brand was one of the attractions of the deal, which is expected to be completed at the end of February.

"Internode is a successful company with an impressive reputation," he said.

"(Its) experienced management team and excellent customer satisfaction record will allow iiNet to efficiently grow its presence in the SA and eastern state markets".

The deal also makes iiNet Australia's second-largest DSL broadband provider with about 900,000 customers, behind Optus with its one million customers.

Internode was born in 1991 to satisfy Mr Hackett's interest in building "cool little bits of hardware with software in them that did things on networks" but was forced to move on because cost levels simply didn't support the idea. The company moved into network provision but was too late to build a viable business on the high-volume, low-margin dial-up market.

Instead, it looked toward the higher-margin ADSL broadband market - and has since converted its corporate base into Australia's fourth-largest residential and corporate broadband provider.

Mr Hackett's success was last year recognised by US conference Future in Review, which named him its entrepreneur of the year.

But it has also given him the freedom to pursue other interests, including racing his black 1985 Ferrari 308GTS convertible and flying sailplanes.

[stumpjumper]

If you read that article carefully, you might hear some alarm bells ringing about the effect of the NBN on competition not just in internet connections but in all the electronic communications which will be carried on the NBN fibres once Telstra's copper wires are ripped up and sold for scrap. The few service providers who will remain to use the NBN (according to Hackett) are likely to enjoy good profits on the taxpayer subsidised network until (in my view, not necessarily Hackett's) wireless begins to burn their bottom line.

Check out the transcript of a speech in March 2011 by Hackett on delimiter.com:

http://delimiter.com.au/2011/03/29/insa ... s-hackett/

where Hackett claims that the NBN wants to send all but the biggest ISPs into mergers, for reasons of its own economic efficiency:

“How many retail national service providers do you think the NBN is planning for? The feeling of the rhetoric is that there wil be hundreds of them. It’s actually just five. We’re the number five player in the industry. Anyone smaller than us, never gets across the valley of death,” says Hackett

Then read delimiter.com again on Internode's recent sale. That article is a bit more forthright than the soft reporting in the Australian, or the Advertiser which failed (as far as I could see) to mention the sale for three or four days after it happened:

"Internode’s inability to gain sufficient scale to compete in a National Broadband Network world was a core reason why he decided to sell the company to rival Internet service provider iiNet, Internode supremo Simon Hackett said this afternoon.

In a media conference held after the $105 million deal was unexpectedly announced this afternoon, Hackett responded to questions about his decision to sell the company by pointing out that he had made a number of public presentations over the past year or so about the difficulty of mid-level ISPs such as Internode competing as Labor’s National Broadband Network was rolled out nationally.

In a landmark speech in March this year, Hackett described the NBN’s pricing model as “insane” for small internet service providers, warning that none will survive their walk through the “valley of death” transition from the current copper network to the fibre future envisioned by the Federal Government.

According to Hackett, the NBN’s pricing model will only be feasible for ISPs with larger than 250,000 customers – which only five retail ISPs in Australia can boast – Telstra, Optus, TPG, iiNet and Internode itself, which will just reach the cut-off mark. At the heart of the problem as Hackett sees it is the number of points of interconnect which the NBN will support — too many for small and medium-sized ISPs to connect to nationally, as well as the cost of trafficking data to each region."

There full text is at:

http://delimiter.com.au/2011/12/22/nbn- ... s-hackett/