Australia's TPG Telecom to buy rival iiNet for US$1.1 billion

SYDNEY - Australia's TPG Telecom Ltd on Friday said it will buy domestic Internet services provider iiNet for A$1.4 billion ($1.1 billion), in a deal that could provoke a counter offer from larger rival Optus.

The deal, which comes at a time when Australia is rolling out a fast national broadband network at a cost of at least A$30 billion, will catapult TPG to No. 2 position in the fixed-line broadband business.

"We believe Optus, as the current No. 2 player in fixed-line, would also be interested in the potential scale benefits provided by iiNet," Citi analyst Justin Diddams said in a note.

"There's also scope for a counter offer from Optus, given the strategic importance of (iiNet's) customer base."

SingTel is the parent company of Optus.

The deal sent the shares of both companies to record highs, with iiNet jumping 27.6 per cent and TPG up 17.6 per cent in a weak broader market.

Post-deal, TPG expects combined revenues of A$2.3 billion and earnings before interest tax, depreciation and amortisation (EBITDA) of A$654 million. The combined entity will provide broadband services to over 1.7 million subscribers.

For the year-ended July 31, TPG had revenues of A$970.9 million and EBITDA of A$363.65 million. It will release its interim results on March 24.

"The TPG board are clearly taking the view that size will offer them some level of protection from industry heavyweights such as Telstra (TLS.AX: Quote, Profile, Research) and Optus," said Mark Lennox, senior private client adviser at HC Securities.

Australia's telecoms industry has already seen several bite-sized acquisitions as businesses move to position themselves in the new fast broadband network environment.

TPG Telecom, which held a 6.25 per cent stake in iiNet, will pay A$8.60 per iiNet share, a 26.3 per cent premium to Thursday's closing price. The all-cash deal would be funded by new debt.

Analysts said the deal, along with a slew of others this week, augured well for the stock market which is seeing its worst monthly performance since November.

On Thursday, Australian pension fund giant IFM Investors said it would buy the bankrupt operator of a large US toll road for $5.7 billion while Whitehaven Coal (WHC.AX: Quote, Profile, Research) lined up a $1 billion bank loan to cut interest costs.

Macquarie Capital advised TPG on the deal while Azure Capital was the advisor to iiNet.