John Linton
......assuming its worth anything at all.....
As the 'rumblings' of ISPs for sale and the enquiries about whether Exetel is for sale seem to be slightly increasing rather than decreasing it seems that there is more 'unease' in ISPland than there has been for some time. Maybe the 'realities' of a post FTTN 'tender' process has shaken up more people than usual and that is in turn causing more people than usual to examine just what they are doing and increasing the speculation on what other people are doing or maybe there has been some sort of 'seismic shift' that I'm unaware of - that could easily be the case.
I have, to date, only taken the very slightest of interests in these issues as they are always beyond my ability to understand and, it seems to me, the various take overs and bale outs of failing and failed ISPs always ends in tears before bed time; i.e. the throwing of good money after bad with shareholders losing even more of their share value than prior to the latest 'buy out' executed on their behalf. The small taking over the smaller is only ever going to end up one way - everyone concerned loses everything. The large taking over the less large seems to go exactly the same way. So size doesn't seem to be a factor. Only the basic principle of business remains a factor despite the short term success of the corporate raider process of the 1970s and then again even more briefly in the 1990s (the belief that an old fashioned company's balance sheet was undervalued and a smart kid from the HBS or LSE could make a lot of money in a very short time by buying the whole company and selling off its components for more than the whole).
Corporate raiding doesn't work in the Australian ISP industry because, for the most part as far as I can see, the balance sheets of ISPs are actually worth far less than their 'face value' let alone what you could get in splitting them up and selling them off. But that doesn't matter because the guiding principle of ISP take overs/bale outs seems only premised on the acquisition of customers and the leverage the buying company's superior management and lower infrastructure costs can bring to the acquired user base.
So, my quite possibly faulty memory tells me, that all small companies that bought out smaller companies in the ISP market sector over the past 5 years ended up going broke very shortly after they bought out some smaller company. Unsurprising as a company that was losing money is never going to add anything positive to anything and has undoubtedly annoyed its customers a great deal while it was going broke resulting in a losing scenario all round.
Although there have been, probably, hundreds of dismal failures in the buying and selling of failing ISPs in Australia there have been four spectacularly successful (for the seller) ISP transactions in the 'history' of Australian ISPs that I can remember (there may well be more but my memory is not what it once was).
The first of these was the sale of one of the pioneering ISPs in Australia - Connect.com - which was sold to a consortium in 1995 with AAPT buying out the other two consortium members (NAB and Sirius Technology) in 1998. The price details were not readily available at the time but the deal was said to be "very satisfactory" by the three owners. AAPT still has an ISP business which was based on the Connect.com buy and therefore you would have to say, without knowing any details, that it was a value for money purchase by AAPT. In this respect it appears to be, at least to me, unique in the 'history' of ISP sales.
The second, and most spectacularly successful ISP sale of all time (for the sellers) in this country (and quite possibly any country) was the sale of OzEmail to Worldcom/UUnet in early 1999 which netted the three founders (including Malcolm Turnbull) over $A400 million (and that was when a million dollars could actually buy you something). However that was a really bad transaction for the buyer who went out of business less than three years later resulting the eventual sale of OzEmail for less than one fifth of what Worldcom/UUnet paid for it - still almost certainly more than it was worth. The fact that iiNet subsequently ran out of money and had to sell off 40% of its company to Amcom and the then Powertel is a fair indication that OzEmail wasn't worth anything like the $A100 million that iiNet paid for it.
Which bring us to the two large transactions in 2008 - the sale of TPG to SPT and the sale of Westnet to iiNet. Both of these transactions involved real money and both gave excellent, in the case of TPG spectacularly 'satisfactory', financial returns to the founders/owners. The owners of TPG and Westnet have been able to bank $A150 million and $A80 million in cash respectively and David Teoh (the owner of TPG) also got 38% of the merged entity and got to run it. Excellent to spectacularly good results for the sellers. Not so good for the buyers.
Looking at the performance of the SPT/TPG share price from the time of the 'merger' (45 cents) to today (20 cents) as shown here:
http://www.asx.com.au/asx/research/ChartsSearchAndResults.jsp?postback=true&asxCode=sot&compare=index&indices=XJO&compareCode=&TimeFrame=D6&chart.x=0&chart.y=0&chart=Create+chart
SPT has (after the merger) 675,000,000 shares on issue which means the company is now valued at $A137 million compared to the $A150,000 it paid in cash for TPG PLUS the $A100,000,000 (36.8% of the issued shares it gave to David Teoh on top of the $A150 mill in cash - most of which it had to borrow). So the simple arithmetic says that at the time of the 'merger' SPT valued itself at 675,000,000 x 45 cents = $303,750,000 while today, less than three months later the share market values SPT/TPG at only $A137,000,000 - a loss of shareholder value of more than 50% in three months. And that's at today's prices - the shares will open lower today and the spiral downwards shows no sign of plateauing or reversing.
This in itself raises an interesting situation where David Teoh could use part of the cash he received from SPT to buy the remainder of the merged company he doesn't own and still have $50 million in cash. Of course he will have to pay much less if the shares continue to follow their current trend - an interesting conflict of interest where the executive chairman of a public company has a vested interest in the share price falling! It more correctly defines that TPG wasn't worth anything like the $A250 million that SPT paid for it with the share market valuing the TPG component three months later at 40% of $A137 million = $A56 million - a fall of 80% in value in less than three months with further falls to come. David Teoh indeed 'deserved one Alan Bond in his lifetime'.
A very expensive loss for SPT shareholders in shelling out so much money for TPG - at this time at least.
The iiNet situation shows a similar situation although the chart results here are exaggerated by the share holder dilution of issuing more shares to fund the Westnet purchase:
http://www.asx.com.au/asx/research/ChartsSearchAndResults.jsp?postback=true&asxCode=sot&compare=index&indices=XJO&compareCode=&TimeFrame=D6&chart.x=0&chart.y=0&chart=Create+chart
Again, it shows that over the past six months the share price has fallen by 40% and the company now has more, not less, debt. Not as spectacularly bad as the SPT/TPG share price fall but not something that you would expect having made a "major acquisition which will drive significant increases in profitability". Bear in mind that iiNet has accumulated $A35 million in losses from its previous take over activities if you look for an indication of the success from its record in previous take over activities.
Of course there can be all sorts of explanations as to why all of these, and countless other, ISP purchases were positive moves by the purchasers - I just can't think of any. It seems to me that all take overs/buy outs end negatively for the shareholders of the buyers and I can't remember any exceptions to that track record - no matter how the actual results are subsequently portrayed by the people who made the purchase decisions.
They didn't 'invent' the phrase - caveat emptor - some 2,500 years ago for no reason.