Speculation grows over iiNet takeover as TPG reaffirms guidance, renegotiates debt

Speculation over TPG’s intentions with broadband rival iiNet has escalated after the company reaffirmed its earnings guidance yesterday, and also confirmed renegotiated debt facilities with improved terms.

Analysts suggest the move makes strategic sense, with an all-out buy of iiNet likely to drive earnings growth for TPG and allow both companies to further compete against market leaders Telstra and Optus.

The speculation over TPG’s strategy has also come under watch after a report from Goldman Sachs analysts suggested the two businesses would have a combined market share of 23% and would be able to synergise their respective offers well.

Discussion began earlier this year when TPG lifted its stake in iiNet from under 5% to 7.24%.

Telsyte director of research consulting Chris Coughlan says while the combined share wouldn’t be overly significant, it would still market a trend of consolidation that has continued on the way to the National Broadband Network.

“Would it be good or bad for industry? I don’t think it would be either. There is consolidation happening, and I do think that in that middle level, there’s transactions going on and certainly iiNet has been quite active there as well.”

Yesterday, TPG confirmed its forecasts for EBITDA of between $250-270 million for the 1012 financial year. Its debt had also been refinanced until 2015, with no mandatory payments until they expire.

Debt has also been reduced by $100 million.

RBS Morgans analyst Nick Harris has reportedly said that TPG would borrow up to $760 million, which could make an all-out buy of iiNet possible.

Coughlan notes such a move wouldn’t necessarily earn much scrutiny from the ACCC.

“I don’t think they’d be concerned, and certainly the NBN wouldn’t care. At the end of the day, the NBN is being driven by the fact Telstra has to cut off its copper wire – it doesn’t care where the retail services come from.”

According to the Australian Financial Review, Goldman Sachs analyst Raymond Tong and Christian Guerra told clients this morning that a transaction between the two companies would be earnings positive, but that it could face some changes given the brand differentials between them.

TPG has positioned itself as a low-cost offering, whereas iiNet has been pushing much more of a premium brand feel as an alternative to Telstra and Optus. In fact, the analysts are quoted as saying the transaction could destroy some value through “higher churn and brand damage”.

Coughlan suggests any transaction would be “a lengthy process”, especially given that iiNet has been active in acquisitions, buying AAPT and TransACT this year.

 “It would be a long process, but it would contribute to an entity that has over 20% market share.”

“Now, that puts it about in line with Optus, including Optus’ cable footprint. That’s a strong position…but it’s not the biggest.”

“Having said that, there will continue to be consolidation in this space.”