Internet entrepreneurs in $81 million tie-up

Michael Malone’s internet service provider iiNet has acquired fellow Perth ISP Westnet, run by Peter Brown, for $81 million.

The cash deal will be funded in part by a $41 million equity placement with iiNet’s major shareholders Ancom Telecommunications and AAPT. The balance will be funded by cash and debt.

iiNet will retain Westnet’s brand, staff and management team and run the Westnet business as a separate entity. When Westnet’s 215,000 active services (including 138,000 broadband users) are added to iiNet’s customer base, the combined entity will have more than 680,000 active services, including over 470,000 dialup and broadband subscribers. That will cement iiNet as Australia’s third largest ISP and give it more than 30% of the West Australian market.

Malone says the deal has been on the cards for a while. “This is Perth and it’s a pretty small place. We’ve talked about it for probably for a decade.” Malone says the decision by Westnet’s shareholders to sell has been prompted in part by the fact three of them are retirement age.

For iiNet, the deal will provide valuable scale. Malone says that while the company has worked hard at cutting costs and improving its infrastructure, revenue growth has slowed in recent years. “Organic is hard work. To take advantage of our cost base we need to build scale and that means acquisitions. “

The deal brings to an end one of the great rivalries of the Australian (and particularly the West Australian) internet sectors.

The links between Michael Malone and Westnet’s chief executive Peter Brown have always been close. They were born just two weeks apart in 1969 and while they come from very different backgrounds (Malone is a self-confessed techie, while Brown is a former chartered accountant) they were both pioneers of the Australian internet scene. Malone started iiNet in 1993 in his garage, with the call centre in his bedroom, while Brown established Westnet in 1994 in the back of his parent’s electrical store.

While Malone took iiNet public in 1999, Brown has been content to keep his company private. Floating has helped iiNet grow quickly, but Westnet’s different focus has helped it build a reputation for strong customer service, a fact acknowledged by Malone in his takeover announcement. Brown, who owned 25% of Westnet, is expected to receive just over $21 million in the deal. Malone’s stake in iiNet is worth about $45.7 million.

Malone says Brown currently serves in more of a consultant’s role at Westnet and does not run the business on a day-to-day basis. Brown has committed to staying involved with iiNet for the next 12 months and Malone hopes to use him in a similar sort of consultant/strategist role.