Eftel buys Engin from Seven


news Diversified media group Seven has offloaded its ill-fated Internet telephony business Engin for just $9.1 million, in the second move by Seven this year to shift its emphasis away from failed investments in Australia’s telecommunications sector.

Engin is a business which was set up in 2004 to focus on the then-burgeoning Internet telephony business. Its founders expected it to go on to challenging major traditional fixed-line telephony players like Telstra and Optus. However, the Internet telephony market didn’t crystallise, and where it did, it primarily saw existing major ISPs such as iiNet and Internode add Internet telephony products to their existing suite of offerings.

Seven Group Holdings had bought into Engin through its publicly listed shared in 2006, and acquired the full business over the past several years. It had also acquired wireless broadband player Vividwireless in late 2007, with commentators believing that Seven was planning in the long-term to offer a triple-play service to Australian consumers consisting of broadband, Internet telephony and content.

However, that solution never quite eventuated. In February this year, Seven announced it would sell Vividwireless to Optus for $230 million, in a move which was primarily fuelled by Optus’ need to acquire spectrum associated with the deployment of its 4G network infrastructure. And this morning, minor ISP Eftel announced that it would buy Engin for $9.1 million – significantly less than the around $30 million Seven is estimated to have invested in the company.

“Over the last 12 months we have established an operation that can deliver large cost advantages from acquired businesses,” said Eftel chief executive Scott Stavretis in a statement. “Due to that foundation, we are able to extract significant earnings from this acquisition, extracting additional value from the increase in revenue that Engin brings into Eftel.”

“Not only does the acquisition of Engin provide immediate benefit to shareholders, this transaction is also strategically very important to Eftel. As the National Broadband Network (NBN) rolls out across the county, VoIP will be the solution used to deliver traditional fixed line voice calls. The VoIP scale and experience acquired under this transaction will greatly assist the Eftel business as the industry undergoes this technology change.”

Commenting on the balance sheet effectiveness of this transaction, Stavretis said: “This acquisition is value accretive for Eftel shareholders. It is consistent with the Board’s stated objective of taking a cautious and measured approach to borrowings when adding earnings and cash flow accretive acquisitions, as Eftel continues to build its portfolio of synergistic profit generating assets”.

Engin has some 85,000 Internet telephony services in operation, the company said this morning, and revenues in excess of $20 million in the 2012 financial year. The company is expected to contribute over $2.5 million in earnings to Eftel, with restructuring costs of $800,000. The total purchase price of $9.1m is approximately 3.5 times underlying EBITDA, post planned synergies, Eftel said.

The Australian newspaper has reported that Seven had invested about $30 million Engin over the past six years. Similar business Freshtel, which was also launched in 2004, revealed in May 2011 that it would exit the Internet telephony business after continuing losses.

Wow. After an extended history of redundancies, financial losses and a financial lifeline constantly being pumped into it by Seven, the future of Engin is finally laid down – and it’s with Eftel.

I’m sure that many people who read Delimiter don’t know much about Engin, but back almost a decade or so ago, it was an extremely hyped company in Australia. The company’s executives were expecting to siphon hundreds of thousands if not millions of telephone customers from Telstra at that point, Engin had blanketed major metropolitan cities with its ads and many investors ploughed money into the startup through its ASX listing.

What the company’s acquisition today represents is a finalization of that dream. Engin never really quite exited startup life and became a real company, and the Eftel acquisition is the effective realization of the fact that Engin’s offering was never really worth a company on its own – it was more a feature that could be added to other companies’ offerings. Coincidentally, Telstra was just last week talking about launching its own Internet telephony (VoIP) services to consumers. How ironic.


      • VoIP over the open internet will always be fraught with call quality issues – (latency, jitter, drop outs) – so it’s hardly surprising. Off-net voice – (via dedicated channels) – is the only way to defeat it.

        • I agree with you with respect to ADSL, HFC cable and mobile broadband, but I’m not sure how this plays out in fibre-land or fibre to the node.

          • In fibre/NBN land, it’s covered because a dedicated 128kbps/128kbps voice channel, with higher priority than standard ‘best effort’ data is available on the NBN.

            In FTTN land, it’s more complicated, because you have to offload it from the fibre at the local node, and modulate it onto the copper to work with your existing phone(s). Certainly doable, but you add a point of latency, more complicated electronics, and more points of failure.

          • hmm this might be worth adding to the ques to ask malcolm list: how will you do phone services over the last mile and how much will it cost both in dollar and reliability terms for your chosen tech supplying voice services?

            i personally think its not been considered let alone costed in the “fuly costed” policy Malcolm allegedly has waiting in the wings. if he really wants to show his strength in the folio, answer the bloody questions aready.

        • Not really… in a properly engineered network, where traffic prioritisation is truly, competently built in to every component of the network, VoIP can definitely be run at PSTN quality. The trouble with virtually all ‘over the top’ VoIP products in Australia is that they’re usually run through consumer grade routers that aren’t capable of handling QoS adequately in tandem with the network.

          • Sure, but you still have ultimately no control over the channel end-to-end, even with routers capable of QoS.

            Many ISPs will even strip your QoS tags out for no extra cost… :o)

        • I have been an Engin subscriber almost since they started and have used it as my primary phone number for all of those years.

          I have never had a problem with jitter, latency or drop outs (unlike my Vodafone mobile service…) although I have always been with ‘premium’ ISPs (iiNet, Telstra) rather than all-you-can-eat-for-$1.99 providers.


          • I’m with engin too, and having no problems with it. I use Telstra cable for internet access and using engin for VoIP with a small fixed fee for unlimited local/interstate calls has worked well. Much better than the ridiculously expensive rates that Telstra charge.

  1. The two biggest surprises out of this story for me:

    1) That Engin has 85,000 customers.

    2) That Eftel would think it worth $9 million to buy. Why not just set up its own VoIP service… 85,000 customers is a lot of customers, but is the revenue return worth the outlay? I guess their accountants think they are.

    • I wholeheartedly agree with the surprise factor about Engin having 85k customers — I thought it would be much less than this. Fundamentally, I think Eftel is viewing this mainly as a technology buy (a VoIP bolt-on to their current customers) and also a small ISP buy, in that many of those customers would no doubt also be Eftel ADSL customers etc.

      • Small/medium companies looking to reduce cost overheads might have switched over. A few hundred here and there and suddenly you’re looking at 10’s of thousands of customers, who in general have a mentality of sticking with the supplier.

        The ATO uses VoiP now for example, and the company supplying them would list 20k customers or so just for that one contract. You wouldnt get them swapping quickly, and if they did it would be for 100% of the staff. On top of that, you know a large Govt department like that wouldnt be going through an ISP, but a dedicated VoiP supplier. Like Engin was/is.

        Having said all that, its a surprise to me as well that they have 85k still. But not necessarily a big surprise.

  2. Engin never really took themselves seriously as a VSP (voice service provider). Unlike the successful players such as Pennytel, MyNetFone, Maxotel, Faktortel and others, they hardly figured in Whirlpool’s VoIP forum, where many people go for recommendations when they are looking for a VoIP provider. Other more dedicated VSPs had sharper prices, more features, better online portals and better customer support than Engin had.

    VoIP is a low margin business and I’m not sure if it’s worth paying 9 million dollars for 85000 customers, many of whom may not be active users. Then again, if Labor is successful at the next election and the NBN continues to roll out in its present form (fibre to the home), VoIP will gradually replace PSTN so it will become big business. VoIP users will also be able to enjoy HD telephony (G722 codec) that is not available over PSTN. Regarding voice quality, these days, providing you have a reasonably fast connection with a quality ISP (we use Internode), call quality is every bit as good as PSTN, especially when calling Australian numbers. I have been using VoIP exclusively for outgoing calls since 2005.

  3. No disrespect to the people at either company, but in the year 2012 could there be two more irrelevant companies in the telecommunication space?

  4. Two reasons this is a great move for Eftel:

    1. Checking through their 2012 financial report [http://www.eftel.com/data/76/eftel_ar2012_screen.pdf], it appears VOIP was their only service area to go backwards, against healthy gains in broadband and mobile. In this respect, the Engin purchase plugs a skills gap, along with a bundle of loyal customers, and gets them back into the VOIP game.

    2. NBN. A substantial part of Eftel’s revenue comes from wholesale broadband – as the NBN rolls out, I expect some wholesale customers to cut out the middle man and go straight to NBN Co. Probably only bigger customers or focussed local providers (because of the 121 POI cost), but these are the customers that will hurt the most. Expanding their VOIP services gives an extra selling point, and if nothing else, may help to keep wholesale customers with the convenience of an all-in-one provider.

  5. I considered Engin when it started, had a requirement for fax at that time, but fax is becoming redundant now as B/Band becomes more available. The Cost of the Engin Box and their call rates sent me looking for alternatives. Settled for Pennytel with a second hand iiNet Belkin Modem with 2 VOIP ports and fallover. Modem wasn’t great but VOIP quality has been excellent (When the ADSL behaves itself) – set the tunnel at 10K per channel.
    Now all Cisco with the new Cisco ATA – very nice and not too expensive
    Do like the emailed voice message facility a) When needed a permanent record and easily and cheaply accessed from anywhere in Aus.
    Also like my X-Tel Softphone with the call record facility, when issues with organizations over the phone, just advises that I too am recording the call, wow what a difference

  6. Who in Telstra has finally woken up to the fact VoIP as a product exists? Miracles never cease to amaze! *faux enpas*

    • They’ve been selling it to Business customers for quite a few years. There was no need for them to push to residential consumers given the existing copper land-line infrastructure etc. The move to enable VoIP for consumers is directly in support of the NBN. NBN customers will utilise the VoIP infrastructure for their landlines. If not for the NBN then I don’t believe Telstra would be offering consumer VoIP yet.

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