Plunge sets floor for iiNet

Ending its five-week trading halt at the beginning of this week, iiNet shares plunged as expected to levels around 85 cents per share, the mark struck as a placement deal with white knight PowerTel Ltd.

The price plunge came after the market had the weekend to absorb news that the Perth ISP’s earnings had been cut by almost 40 per cent, that depreciation and amortisation would drive it into the red, and that the Sydney-based telco had paid half the price that iiNet last traded on the market.

Shares in iiNet traded as low as 67 cents and as high as 97 cents on Monday before settling back to the 85-cent level, a floor provided by the PowerTel deal. By Tuesday they had recovered some more ground.

Managing director Michael Malone and his chairman Peter Harley will be hoping that the price stays at around this level at the very least, with about $3.2 million riding on the share price staying above the 75-cent level.

Under the deal, PowerTel will receive almost 16.4 million shares, but the second tranche of almost 3.8 million shares is conditional on iiNet shares not trading below the 75-cent price for 10 consecutive trading days before August 22.

For its part, iiNet’s executive team will be out trying to restore the company’s reputation as a legitimate challenger to Telstra and Optus in the delivery of broadband services, including VoIP phone calls.

iiNet has 185,000 broadband customers through its ADSL service and more than 190,000 customers on the slower dial-up service.

The new alliance between PowerTel and iiNet is already trying to promote the synergies.

PowerTel believes the deal will bring forward $10 million in revenue for itself and wholesale customers, while iiNet sees a growth story in its infrastructure being used for wholesale broadband in significant way for the first time.

Mr Malone, this year’s WA Business News 40under40 First Amongst Equals winner, also has more obvious reasons to return iiNet’s share price to its former glory.

With more than 18 million shares, the paper value of his holding has dropped from around $61 million in September, when iiNet shares briefly traded at a peak of $3.40 each, to about $15 million based on the PowerTel deal.

With Perth-based GEM Consulting engaged in a strategic review of the company’s operations, one issue on the table is the status of iiNet’s New Zealand operations, which trade largely under the ihug banner.

The sales of this operation has been touted as a way of raising cash, possibly as much as $30 million, at the same time as removing an unnecessary distraction for management from iiNet’s Australian operations.

On Friday, iiNet revealed details of what it had uncovered since calling a trading halt in its stock in April.

It confirmed earnings before interest, tax, depreciation and amortisation were likely to fall from the previous forecast of $40 million to under $25 million.

The variance was based on the following.

• iiNet had to provide almost $2 million in customer credits based on wrong billing for accounts closed, credit for service outages or errors relating to integration of acquired subscribers.

• Double counting of usage revenue was $1.8 million.

• Increased call centre costs of $900,000.

• Professional fees of $1.1 million, including consultants such as Ernst & Young brought in to find the problems.

• Staff redundancies, delays on infrastructure rollout, travel expenses and other costs came to almost $1.8 million.

• Dial-up revenue was $3.1 million lower due to integration with Ozemail and customer churn.

• Additional bandwith from Telstra cost $580,000.

• Broadband customer revenue was $1.5 million less than expected – or $1.37 per customer per month.

• Voice revenue was $1 million lower than expected – or $5 per customer for the second half of the financial year.

• Delays in two cost reduction projects amounted to almost $1.8 million in undelivered benefits.

iiNet said in its announcement that many of these issues were one-off costs due to delays or forecasting issues relating to the integration of the Ozemail customer base which would not be repeated.