soe network company tipped for ihug purchase

SOE network company tipped for ihug purchase
08 October 2006
By TIM HUNTER

Taxpayers could end up owning internet service provider ihug as state-owned Transmission Holdings nears the sharp end of negotiations on the deal.

The network company is understood to be one of two companies in the hunt to buy the Auckland-based ISP, put up for sale by its Australian owner iiNet in July, after talks have whittled down more than 30 interested parties.

The other potential buyer has not been confirmed, but speculation has focused on TelstraClear.

A deal is expected by the end of the month. Market talk puts the price at $40-$50 million.

Transmission Holdings was spun out of TVNZ three years ago to focus on growing its broadcast and telecommunications business.

The company's network carries TV broadcasts nationwide, as well as wireless broadband internet services, and operates the broadcast TV network in Australia. It is also testing Wimax technology for high-speed data and voice communications.

Chief executive Geoff Hunt said THL was interested in growing its business on both sides of the Tasman.
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"We've got a continuous process of considering acquisitions but we've got a policy of not commenting until the deal is done," he said.

One investment banking source said ISPs such as ihug were facing a drastic cut in margins as customers moved from dial-up to broadband services.

"These guys will all be out of business in five years' time," he said.

"In fact, I wouldn't be surprised if it's three years."

Ihug is trying to mitigate that effect by acquiring enough phone customers to justify buying its own equipment to put in Telecom's exchanges. That would restore its margins, but chief executive Mark Rushworth has acknowledged the days of the pure ISP are numbered.

To survive, an ISP would need three things, he said, "genuine scale, the ability to cross sell, and broadband as the carrot (to attract customers)".

For Transmission Holdings the purchase of ihug would be a significant change, adding a consumer focused business for the first time, but as a telecommunications player with useful network assets the SOE is well placed to build itself into a serious competitor to Telecom and Vodafone, if it chooses.

The investment banker commented: "If I was the government and trying to stimulate investment in New Zealand, maybe they should be saying to (THL) `you're the closest thing to a telco we've got'. Maybe it should say `if you've got a good idea we've got $100m to invest'."

THL reported revenue of $130m in the year to June 2005, producing net profit of $15m.

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