Perth based ISP iiNet is to buy New Zealand's third largest ISP Ihug for $A30.1 million, subject to shareholder approval.
The deal also includes 23.7 million shares in iiNet valued at $A1.75 it was revealed today. IiNet shares last traded on the Australian Stock Exchange at $A2.50 each.
No staff layoffs are expected as a result of the merger, something iiNet managing director Michael Malone says bodes well for the new company.
"We have a great geographical fit with the two companies. IiNet is strong in Perth, Darwin, Tasmania and regional Victoria while Ihug has New Zealand and we both have some presence on the eastern seaboard of Australia."
Neither company has overlapping network rollout or duplicate offices and that, combined with both companies being debt free already, means a combined revenue of around $A100 million for the first year of operation.
"Our numbers don't include any synergy numbers so there's nothing about cut backs, closing services or whatever to make the grade. We expect to make a profit in the first year of around $A16 million and we can do that without any shrinking at all."
The brand name Ihug will remain in both Australia and New Zealand, with the local operation accounting for roughly one third of the total business.
"The operational split is one third in Western Australia, one third in New Zealand and the fast growing eastern coast the remainder."
Share wise, the Ihug owners will see their shares carried over into the new merged company. The Wood family, Tim, Nick and father John, will end up owning around 20% of the business. CallPlus, which owns 10% of Ihug, will be left with 3.4% of iiNet.
New Zealand managing director Martin Wylie says this is a good sign.
"Any of our shareholders could have sold out at this point but they all decided to stay with the company which is a good sign for the future."
IiNet is very interested in Ihug's telephony package and will be rolling that out in Australia as quickly as possible.
The Wood family will also establish a trust fund for long-serving Ihug staff so they too can share in the rewards.
"The details are still to be worked out but it means they'll partake in all of this as well," says Wylie.
Ihug's satellite product, Ultra, will take centre stage in Australia. Malone says iiNet receives around 2500 applications for its DSL service each month and has to turn down around 20-30% of them due to distance-related issues. DSL speeds break down the further from the exchange the end user is, and in rural Australia this is a big issue.
"There's a real opportunity for us there to use the satellite service to extend our broadband offering."