Dodo chief Larry Kestelman tells SmartCompany: Why I just sold my company for $203 million

The consolidation in the telecommunications industry continues, with former Smart50 entrant M2 Telecommunications confirming it has purchased low-end provider Dodo for $203 million.

The purchase is a good example of how providers are gearing up for the National Broadband Network. M2, traditionally a wholesale company, has now moved into the consumer space by snapping up Primus and now Dodo.

Speaking to SmartCompany this morning, Dodo founder and chief executive Larry Kestelman said after working in the business for 12 years now was the right time to sell.

“The company has gotten to a certain point. Organic growth is something we’ve been great at, and this adds scale to that supply,” he says.

“This gives everyone here a chance to work as part of a larger organisation and gives them progression and growth. I thought the timing was good.”

M2 confirmed this morning it snapped up Dodo for $203.9 million, along with recommending a takeover offer for provider Eftel, which counts common shareholders with Dodo after a deal in 2011. The total transaction will add $400 million to revenue and $50 in earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2013-14, with M2 confirming an EBITDA multiple of five for both acquisitions.

In a statement, M2 confirmed Dodo recorded $29 million in EBITDA during 2012-13, up from last year’s $21 million. Eftel counts EBITDA of $8 million.

Kestelman is now set to become a large shareholder in M2, and adds he’ll be sticking around for a while.

“I’ll certainly be involved; I’ve taken a stake in shares. With that I will certainly be involved, although I’m not sure yet whether that’s going to be in an informal or formal capacity.”

Kestelman’s decision comes at a good time, when prices for small telcos are at a premium. Larger providers need scale in order to thrive on the NBN. Kestelman says the arrival of the NBN moved M2 to pursue smaller players.

“It’s more of a reason for M2 to buy and not so much for me to sell,” he says, although adds Dodo will be well-suited to the arrival of the NBN.

“We know how to grow our business and we’ve been in a good organic growth position. The NBN is not going to be about networks, it’s going to be about how you can service clients.”

“There’s good synergy between the two businesses.”

In a presentation to investors this morning, M2 said Dodo had 400,000 customers and 660,000 active services, making it an attractive target. It also noted the Dodo’s gas and electricity division is growing strongly.

The company said the business “delivers a profitable and organically growing consumer telecom business which is highly complementary to M2’s existing consumer division.”

David Kennedy, senior research manager at Ovum, told SmartCompany the acquisition makes sense given the current nature of the telco market, and said it’s a good example of how businesses have slightly shifted strategy ahead of the NBN.

“M2 started as a wholesale operator, but with these acquisitions it’s taking a place in retail as well.”

“It probably reflects underlying changes in wholesale as well as the NBN.”