Founder and minority shareholder of iiNet, Michael Malone, has emerged as another critic of the $1.4 billion agreed takeover of his former company, as chairman Michael Smith sought to defend the deal with rival TPG Telecom.
Founder and minority shareholder of iiNet, Michael Malone, has emerged as another critic of the $1.4 billion agreed takeover of his former company, as chairman Michael Smith sought to defend the deal with rival TPG Telecom.
Mr Malone emerged from self-imposed exile this week to launch a broadside at the iiNet board for creating the conditions for a deal some investors have suggested was opportunistic and undervalued the nation’s third biggest internet service provider.
“I will oppose the proposed deal of TPG taking over iiNet,” Mr Malone said in a statement.
Mr Malone reportedly has a beneficial interest in a 2.5 per cent iiNet stake via a family trust.
“My family and I do not believe that this deal as it is structured is in the best interests of shareholders, staff or customers,” he said.
“Indeed, it is appallingly silent on the impact on staff and customers.
“And I ask that if this deal is defeated, then the current board stand aside.
“They have run out of ideas on how to grow this great company. Leave. Management is constrained by a board that is consumed by compliance instead of growth.
“I ask shareholders to put forward entrepreneurs for the board who reflect the culture.
“It's not the time to sell; it's a time for change.”
Mr Malone’s comments follow strong criticism last week by BT Investment Management, which is iiNet's biggest institutional shareholder with a 5.7 per cent stake.
BT objected to the pricing and structure of the bid by billionaire David Teoh-controlled TPG Telecom, stating that the target’s investors were not fully sharing in the synergies created by the proposed merger.
BT Investment Management head of smaller companies Paul Hannan reportedly viewed the cash bid as less attractive than a scrip bid, which would have allowed iiNet investors to share in the upside from the deal.
It may also have opened the door to a rival bid from other players in the sector, such as M2, which may not be able to muster a full cash bid.
iiNet chairman Michael Smith hosted investor and media conference calls today to explain the board’s thinking and rebut the criticism of the deal.
Mr Malone used the investor conference call to directly challenge his former chairman, saying the deal was incomplete, unprofessional and lacked due diligence.
“It’s been 10 days since the deal was announced and now you think it’s time to talk to shareholders - I don’t believe this has been marketed well,” he said.
Mr Smith responded to the former chief executive's criticism by emphasising that the company had a clear growth strategy and lots of new ideas.
“Michael (Malone) hasn’t been in our boardroom for over a year,” Mr Smith said.
“I would seriously contest that we have run out of ideas.”
Howver, he also said the benefits of the company’s existing growth strategy were uncertain and would be delivered in the long term, compared with the certainty of TPG’s $8.60 per share cash offer.
Mr Smith said the board had evaluated whether iiNet, which has a history of market-leading innovation, could do better staying as an independent entity.
“As a director you can be a victim of your own vanity,” he said.
“You need to make an objective assessment.
“We’ve taken a decision that brings us no joy, other than the benefit to shareholders.”
Mr Smith said the board had considered the possibility of a competing takeover offer before recommending the TPG proposal, but discounted this.
“We are well aware of who the competing bidders are,” he said.
Mr Smith claimed it was simplistic to look at the strong run-up in TPG’s share price since the deal was announced – which critics have cited as evidence that TPG will capture most of the benefits of the two companies coming together.
He attributed the rise in TPG’s share price to “financial mechanics”, specifically that TPG will add some debt to its balance sheet, and that it trades at a higher earnings multiple than iiNet.
Mr Smith said critics had also assumed TPG would extract synergies by cutting costs at iiNet, to the detriment of its customer service standards.
“We don’ think that’s going to happen,” he said.
“They’ve bought a brand and a service culture, they won’t get value without preserving that.”
Mr Smith acknowledged there was deep concern among iiNet staff and clearly some risk, but observed that David Teoh was a very successful business owner who would understand where the value lay.
He confirmed that the iiNet board had requested a scrip alternative, but TPG had only offered cash terms.
TPG has not explained why it took this path, but it’s generally seen as preserving Mr Teoh’s control through his 36.7 per cent shareholding.
The takeover offer will be put to iiNet shareholders for approval at a meeting in June.
To be accepted, the proposal needs backing from 75 per cent of votes cast and 50 per cent of the shareholders that vote.
Mr Malone ran iiNet from its founding in his mother’s garage in 1993 until 2013, when he took a sabbatical.
He officially stood down from the board and management in early 2014 and soon after sold down his stake below the 5 per cent threshold requiring substantial shareholders to disclose their holdings.
He now lives in regional NSW.
The proposed iiNet deal and another takeover, that of Amcom Telecommunications by Vocus Communications, means WA will no longer be represented among the top 10 companies in the important information technology and communications sector. See related story here.
