iinet better without ihug

iiNet better without ihug
Fleur Leyden

July 21, 2006 12:00am


IINET'S decision to sell its New Zealand internet service provider ihug increases the company's attractiveness as a takeover target, analysts said yesterday.

The Perth-based internet provider, which recently entered a six week suspension, slashed its earnings forecasts and watched its share price plunge, yesterday said it had begun a formal sale process for ihug.
iiNet executive chairman Peter Harley would not speculate on the value ihug could attract but told BusinessDaily that a number of parties had already shown interest in the business.

iiNet bought ihug three years ago then valued at $NZ81 million ($A67 million) -- comprised of $NZ31 million in cash and 23.7 million of iiNet shares then valued at $NZ2.50.

Analysts said Telstra's New Zealand operations, TelstraClear, or Vodafone, were the most likely suitors.

Neither of these companies would comment yesterday.

David Kennedy, research director at independent analyst firm Ovum, said it made sense for iiNet to focus solely on the Australian market.

"Given they have had some financial difficulties, trying to expand in New Zealand at the same time is a distraction," he said.

"This is part of a broader trend of broadband markets consolidating."

Other analysts said that dispensing with the New Zealand business made iiNet a much more attractive takeover option.

"If somebody was going to buy iiNet they would buy it for the Australian business not the New Zealand business so this cleans it up," said one analyst.

He added that News Corporation, which owns the Herald Sun, or telco Optus could be interested.

Satellite TV operator British Sky Broadcasting Group PLC, which is 36.6 per cent-owned by News Corp, last year showed its appetite in the ISP space, buying high-speed internet provider Easynet Group PLC for 211 million pounds ($A281 million).

iiNet's Mr Harley said he was "not sure" if a purely Australian focus would produce a takeover.

"If we can make the business stronger and have capital to continue to develop the Australian business . . . and that makes us more attractive then that's good for shareholders," he said.

Mr Harley added that the company "was back on track" since its disastrous earnings downgrade.

iiNet said ihug had more than 120,000 customers, making it the third-largest ISP in new Zealand, behind Telecom New Zealand's xtra and TelstraClear.

iiNet scrip closed 1 higher yesterday, at 71.