Vodafone should buy iiNet before TPG can



opinion The exit of Michael Malone from the company he founded 20 years ago has re-opened long-running speculation that top-tier broadband player iiNet could be acquired, and it’s a valid idea. But the telco most suited to buying the powerhouse from Perth is not hostile rival TPG; it’s ailing mobile telco Vodafone, which still has plenty of cash up its sleeves.

Nobody could accuse Australia’s financial analysts of being sensitive to others’ feelings. Celebrated Australian entrepreneur and technology Michael Malone spent twenty years building up his company and helping to deliver fast broadband to millions of Australians. Yet just days after his resignation, the speculation had already begun about how long it would take arch-rival TPG to buy iiNet out.

“TPG could move on iiNet this year,” screamed the headline published by the Financial Review newspaper last week. And analysts from Citigroup, Goldman Sachs and others were quick to talk up the prospect of TPG chief executive David Teoh sliding through the backdoor into Malone’s office.

From a certain perspective, such talk makes a great deal of sense. There is no doubt that Malone was personally against his company being acquired by a rival such as TPG; over the years the executive has vastly preferred the role of hunter rather than prey. Malone’s game lounge contains the pelts of rivals such as Internode, Adam Internet, Netspace, Westnet, OzEmail, AAPT and more.

With Malone out of the picture, it’s not hard to imagine iiNet reverting to more of a traditional company culture which would value the quest for a quick return on shareholders’ investment more than its long-term survival as an independent vehicle. Once professional executives get to a certain level, they tend to be willing to compromise their ideals for the right price; a vice Malone never shared.

Then too, speculation about iiNet’s future has been bubbling along ever since mid-2011, when cornerstone investor Amcom divested its 23 percent stake in the telco. That move followed the earlier departure of Telecom NZ from iiNet’s share register and opened the door for TPG to quietly pick up several decent parcel of shares in the company; it currently owns about 6.3 percent of iiNet.

TPG, which maintains a substantially higher profit margin than iiNet due to its penchant for keeping its costs at absolute rock bottom and delivering better margins through backhaul acquisitions such as PIPE Networks, has been better able to pay off debt it picked up through acquisitions. Even though the company only recently bought the remnants of AAPT in December last year for $450 million, it won’t be too long before TPG can extend its debt facility once again and start looking for another target.

That’s just David Teoh’s style.

The final piece in the puzzle is the shifting regulatory climate. Malcolm Turnbull’s ongoing destruction of Labor’s all-consuming National Broadband Network policy is likely to mean that infrastructure investments by retail telcos such as Telstra, Optus and TPG have come back on the table. It is unlikely that the Communications Minister will ignore the Coalition’s underlying philosophy of market deregulation and stop the Fibre to the Basement deployments such companies are planning from going ahead.

Out of Australia’s top four broadband telcos, iiNet will emerge with the weakest position in any race to deploy new broadband infrastructure. Telstra, Optus and TPG (with its PIPE Networks and AAPT buyouts) already own vast swathes of fibre backhaul infrastructure. iiNet, which has focused on the retail market, does not, and will find it difficult to compete. Then, too, Telstra and Optus are likely to get hefty cash payouts from Turnbull’s plans to acquire their HFC cable networks.

This leaves iiNet in a difficult and vulnerable spot. It doesn’t have the resources or network to continue growing at the same rate shareholders tend to like. Much of this position is the Federal Government’s fault. iiNet’s strategy of going hard as a retail ISP had looked fantastic when the Government was planning to build an all-fibre National Broadband Network. Now that that dream is dead, iiNet is left looking at a field of rivals who already own their own rival infrastructure.

However, from almost everyone’s perspective, a TPG buyout of iiNet would be a disaster.

The two companies’ management cultures, their customer bases, their product sets, their marketing approach and their overall corporate cultures could not be more different. Any merger with TPG would be likely to send many iiNet customers running screaming for the hills, and any attempt to integrate the two companies would end up in a Frankenstein’s monster of mixed approaches.

The national competition regulator would be unlikely to block a TPG acquisition of iiNet, due to the argument that such a merger would create a stronger competitor to the still-dominant forces of Telstra and Optus. However, the reality is that a TPG/iiNet merger would destroy much of the innovation in Australia’s broadband ecosystem. iiNet is virtually the only player innovating at all in broadband at the moment — and then only marginally, compared to the advancements made in the 2000’s.

The logical answer to these large, important, structural issues in the telecommunications sector is for iiNet to find another sugar daddy who’s got the cash and the synergies to take it to the next level, irrespective of what happens with respect to the tragicomedy which is the NBN project (or, under the Coalition, the CBN, as it is now known).

The most likely candidate for this would be Vodafone.

An iiNet acquisition would solve many problems for Vodafone. The mobile telco has long suffered in the local market due to its lack of fixed backhaul infrastructure to support its mobile networks (a factor Telstra and Optus continually exploit). An acquisition would allow each company to target their products at a huge new market, with Vodafone doubtless able to switch hundreds of thousands of iiNet fixed-line broadband customers onto mobile bundles, and iiNet able to sell its fixed-line portfolio to Vodafone’s mobile base.

The companies have many joint supplier relationships — including with network hardware vendors such as Huawei — and similar ‘Generation Y’ corporate cultures. Their product sets are not dissimilar, with both largely focused on the middle market of moderate spenders after a decent telecommunications experience (not the bottom of the basement that cut-rate telcos such as TPG and Dod go after). And both are heavily focused on customer service outcomes.

The question of whether Vodafone can afford to buy iiNet is also largely a moot one.

Although the mobile telco has been losing money hand over fist in Australia recently, there are strong indications that Vodafone is about to pull its business back on track (Delimiter 2.0 article). iiNet is only worth about $1.2 billion total at today’s share price. When you consider the fact that the global Vodafone recently picked up US$130 billion from the sale of its stake in US carrier Verizon (funds former Group Vodafone Australia chief Bill Morrow has already acknowledged pitching for for further investment in Australia), it’s not hard to envisage the big V blowing a decent wad of cash on picking up the big ii.

It’s worth remembering that Vodafone Australia’s joint venture backers, Hutchison Whampoa and the global Vodafone Group, have ploughed hundreds of millions already into the company over the past few years as part of the #Vodafail remediation effort. If they want to ensure their investments make a return over the medium-term, doubling down with a further investment in iiNet starts to look like a safe bet.

Of course, there are roadblocks in the way to any buyout. TPG’s ownership of 6.3 percent of iiNet remains one, as does Malone’s 5.6 percent and even the 3.74 percent of the company still owned by Internode founder Simon Hackett. iiNet is also held by many small investors. Any buyout attempt would be likely to push its share price up substantially, even though it’s already at record highs.

If a buyout of iiNet is to occur — and the history of consolidation in Australia’s telco industry as well as iiNet’s ongoing lack of major shareholders suggests it is probably inevitable — then the best suitor at the moment is likely to be Vodafone. Telstra and Optus would likely be blocked from any move for competition reasons, a TPG acquisition would be a terrible outcome for everyone, and other suitors are a bit thin on the ground.

But a Vodafone buyout would be a good outcome for everyone concerned. It would shore up the futures of both companies, create a more viable competitor to Telstra and Optus, and ensure that customers and innovation weren’t left in the ditch at the side of the road. I’ve been to quite a few Vodafone product launches over the years filled with dancing showgirls dressed in red. I’m sure iiNet mascot and nervous geek Finn would take a while to fit in with this relentless hedonism. But in the end I’m sure he’d pluck up the courage to make some new friends.

Image credit: Vodafone


  1. I wonder how this would effect Internodes ‘Node Phone’ which uses the Optus mobile network?

  2. Makes a lot of sense, with the way Optus is pushing out its MVNO’s (see how bad TPG’s mobile plans are now for a good example) the only way to actually grow a decent mobile base is to own the network.

    Not going to happen though, iinet is worth a lot more to TPG so they will always outbid voda.

  3. “Celebrated Australian entrepreneur and technology Michael Malone”… so he really is/was a Borg?

  4. “with Vodafone doubtless able to switch tens of millions of iiNet fixed-line broadband customers onto mobile bundles”

    How many tens of millions of fixed-line broadband customers do iiNet have that you estimate Vodafone could switch onto these mobile bundles?


  5. You do know that Vodafone is using Pipe Network fiber to a giant amount of their Mobile Phone towers (3G / 4G etc). And Pipe is owned by TPG.

  6. A good article, but unfortunately much of the technical detail is wrong or not relevant.

    Although Vodafone does have issues with a lack of fibre for backhaul purposes, acquiring iiNet will do little (if anything) to solve this problem – iiNet sources backhaul from Telstra, Pipe Networks/TPG, Vocus, Nextgen and Optus for the vast majority of their needs (they do not own any backhaul assets beyond some limited build-out in very constrained areas). Further, Vodafone already have a relationship with Pipe Networks/TPG to address this issue.

    Additionally, I’m not sure why Huawei is being mentioned as a common network vendor. iiNet has Juniper at the core, Internode has a Cisco heritage and both utilised Ericsson DSLAMs in their network roll out. Vodafone make use of Juniper gear in their IP core and Huawei radio interface gear.

    The mention of “tens of millions” of fixed line customers being shifted anywhere is also dubious – iiNet do not have “tens of millions” of customers, let alone fixed line customers. Further, their market position in terms of MVNO numbers is well behind TPGs.

    Given the synergies that are much more likely between TPG and Vodafone (technology mix, need for cost control, infrastructure capacities/needs), a merger between these two would be a better outcome for both sets of customers potentially.

    • Cheers, fixed the tens of millions thing.

      Valid point re backhaul, although I suspect iiNet has more useful infrastructure than people would think. In terms of the vendors, both companies use a variety, as you mention. I mention Huawei because Vodafone is heavily reliant on them at this point, and I also know iiNet has dealt with them over the years.

      As for Vodafone buying TPG, it’s quite unlikely. From what I recall Teoh personally still holds a huge chunk of the stock; and I highly doubt he would sell it. He’s kind of the empire-building type ;) The whole reason we’re discussing this issue is because iiNet lacks such dominant shareholders on its registry.

      • I agree on the useful infrastructure piece. Vodafone have a demonstrated history of building IP networks poorly in Australia! Can you elaborate on iiNet’s dealings with them and educate the ignorant (example: me)?

        I agree that it’s very unlikely that TPG would ever be bought by Vodafone, although a merger of sorts isn’t beyond the realm of reason, and I have heard talk of discussions between staff at TPG and Optus about the future of their relationship should SingTel decide to pull back (as has been rumoured).

        • Singtel won’t pull out – Optus is a major source of profit and revenue. I think regulators might get upset about a merger between TPG and Optus as well.

          If Voda go buy something here then TPG looks a better bet from an infrastructure perspective. But, as per my other post, why invest in Australia when there’s likely more money to be made around the world.

  7. Voda’s issue in Australia is that it’s not pure Voda – it’s a JV between Voda and Hutchison still. Voda globally has a lot of cash from it’s sale of its VzW share in the USA and has been buying up last mile assets. Voda NZ is pure Vodafone.

    Main issue is – is it worth Vodafone spending the money to (a) buy out Hutch (b) invest in another company? There are many other regions in the world where there is still growth available – Australia is a mature market – mostly just involving stealing customers from other telcos. eg. I’d spend the money in Asia or Africa or maybe South America rather than Australia. Small population, limited growth potential.

    If they think it is worth investing in AU then I’d suggest that buying TPG would be a much, much better result than iiNET. TPG has the AAPT+PIPE assets as well as PPC1. iiNET’s long term decision to not have infrastructure makes it vulnerable in the same way Voda is already.

    • As I said above …

      “As for Vodafone buying TPG, it’s quite unlikely. From what I recall Teoh personally still holds a huge chunk of the stock; and I highly doubt he would sell it. He’s kind of the empire-building type ;) The whole reason we’re discussing this issue is because iiNet lacks such dominant shareholders on its registry.”

  8. Your a couple years too late. VHA considered buying iiNet and AAPT a while ago.

    However having personally worked on VHA backhaul I can tell you that your all wrong.

    Firstly VHA is a major customer of AAPT, who was purchased by TPG just recently. VHA have their layer 2 transmission spread across multiple providers, such as Optus, AAPT, Telstra and Nextgen. They surf around looking for the best price.

    Secondly VHA issue has nothing to do with the price it pays on wholesale IP. Transmission prices are extremely cheap these (makes you wonder how they can charge so much for bandwidth). The last pricing i saw (not necessarily for VHA) was for less then $20 per mbps, and that was a few years ago. I wouldn’t be surprised if its single digits, especially with large gbps purchases. It would make no sense either buying or creating a transmission network from fibre.

    Thirdly there is potential in the future to use the pCell for backhaul.

    Fourth, VHA biggest issue is communications. When they had the Great Bandwidth Crunch GBC) you have to ask yourself surely the network engineers sent MRTGS to the execs asking for more layer 1/2 bandwidth?

    Surely there were powerpoint presentations where growth predictions and analysis was conducted? Were there not CAPEX budgets and hundreds of tedious meetings about network provisioning? The systemic failure in VHA was the fact they were facing a bandwidth crunch the sales and colouring (marketing) department decided to launch an unlimited voice product, with free facebook and heaps of data, with the iPhone 4 (a huge device in its day). It didn’t help that in 2008 VHA’s parent decided to strip billions out of the business, making it difficult for it to upgrade its network.

    The GDC was the consequence o terrible communications in VHA and there is no evidence whatsoever that they have solved this problem. Worse the company is in serious trouble. They’re overwhelmed by millions in churn losses, huge errors in their ‘new’ billing system and enormous amounts of unpaid debt (with yours truly hiding in it), and cash flow issues as a consequence.

    Lets pretend VHA could scrap together the cash (which they would put it in layer 1 upgrades) to buy iiNet why would they? iiNet has a little bit of fibre, mostly dark and mostly in isolated geographic areas. In terms of customers and revenue sure its nice but as proof has shown iiNet simply cannot put the numbers on with organic growth. They grow through acquisition and there is really no one else out there they can acquire (except for M2 – but they don’t have the sort of customers they target).

    • We’re all wrong? For a start, it’s spelled “you’re” in the context you’re using it in. :-)

      Regarding backhaul, it is very well known that Vodafone has relied heavily on microwave transmission and this was noted by Goldman Sachs in various reports at least as recently as 2012 (http://www.smh.com.au/business/vodafone-optus-unveil-mobile-joint-venture-20120503-1y0nm.html) . The fact that Vodafone contracted Pipe Networks to build out backhaul to address this acknowledged problem (http://news.smh.com.au/breaking-news-business/tpg-to-provide-cable-network-for-vodafone-20101117-17xbd.html) shows that the strategy of microwave coupled with limited backhaul purchased from transmission providers simply isn’t working for VHA.

      Why have you mentioned pCell in terms of backhaul? Backhaul links are point-to-point, static and fixed – pCell applies to cellular networks and has no application in fixed link technologies.

    • VHA -> Pretty much spot on on 1984.

      TPG -> In 15 or so years bought 6 companies valued for the infrastructure or IP, to resell it own infrastructure and IP (intellectual property)

      iinet -> In 15 or so years bought many ISPs for customer base to drive down cost by buying in volume from infrastructure companies.

      State of Rivalry between TPG Internet division and iinet
      Media -> Yes
      Joe blogs in forums -> Yes
      Juniors pen pushers in each company -> most likely
      Middles managers in each respective companies -> probably most likely
      Senior Managers in each respective companies -> passing interest
      Board level -> curious but not interested.

      my observation looking back a few years.

      TPG buys it first offer
      iinet been rumored to have been offered to iinet earlier but iinet not interested.

      AAPT round 1
      TPG plays low ball on the value of AAPT consumer adsl customers, really wants fibre.
      iinet values AAPT consumer adsl customers and buys them.

      TPG outbid by Candians
      iinet look buts does not bid.

      iinet offloads fibre to NBN

      AAPT round 2
      TPG buys
      iinet rumored to look but interested

      My guess

      If TPG was given a billion dollars -> iinet would not be the top acquisition target
      If iinet was given 5 billion dollars -> TPG would not be the top acquisition target

  9. I can’t see iinet wanting to merge with M2. The word on the street around a year ago was that conversations were had and iinet wouldn’t consider a partnership of equals. Not surprising really – I’m not sure how iinet looks under the hood but from first hand experience I can tell you how M2 looks – not pretty. They are a small part of the way through consolidating billing platforms using a small team that will take years to get there. Their core smb business has been in steady decline for years, with only wholesale keeping them above water. Dodo is the only growth business ever bought, and none of the declines have been turned around, all that’s happened is that all new subs have been pumped into Commander and moved from other smaller brands, giving a false impression of growth. The trouble is before the market realises they buy another company.

    My prediction for M2’s near future is cost cutting, synergies, efficiencies and restructures to try and deliver the financial growth they had in recent years. Yes – off shoring and redundancies if you are not clear what i mean.

    I read their investor pack and it looks like they will go for more ATL stuff than before, interesting, but can they use the money well?

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