Sydney-based telco PowerTel is to take a 14.9 per cent in iiNet as the Western Australian ISP is expected to return to trading on Monday with a revised earnings outlook of $24.6 million for the full year, before abnormal items.
Sydney-based telco PowerTel is to take a 14.9 per cent in iiNet as the Western Australian ISP is expected to return to trading on Monday with a revised earnings outlook of $24.6 million for the full year, before abnormal items.
The PowerTel stake has been agreed at 16.4 million shares at 85 cents each, a 50 per cent discount to the $1.69 per share price that iiNet last hit before a trading halt in its shares was called about five weeks ago.
The price is a huge drop from iiNet's $3.40 per share peak in mid September last year and produces a market capitalisation of around $100 million.
However, iiNet sees upside from the deal by marrying its existing broadband infrastructure, established for a retail customer base, with PowerTel's wholesale client network of smaller ISPs.
IiNet's revised EBITDA guidance is down from its previous guidance of $40.1 million with the company expecting to report a net loss for the year after amortisation and depreciation.The company has forecast revenues for the period to be approximately $250 million.
The company said that based on recent trading and the budgeted result for the next three months, iiNet was currently operating at a normalised run rate of $25 million EBITDA per annum.
Due to several one off costs incurred since January and improvements in the network cost base, iiNet believes this level of EBITDA is the most accurate reflection of the current profitability of the business.
iiNet managing director Michael Malone said, "We are extremely disappointed to report this downgrade.
"There are a number of reasons that have combined in this half to produce a result that is significantly less than our market guidance..."
"We recognise that this situation is unsatisfactory for shareholders, but the company remains in a good position, with over 600,000 services and Australia's largest ADSL2+ network."
iiNet executive chairman Peter Harley said that the issues with iiNet's financial position had not been identified early enough.
"iiNet has been through a period of rapid growth in the last few years, including the acquisitions of iHug in New Zealand and OzEmail in Australia, resulting in iiNet now being the third largest internet service provider in Australia and New Zealand," said Mr
Harley.
"In every other six month period since 2001, there has been either a large acquisition or a major integration. This is the first clear period without such activity and it is now obvious that, with the rapid expansion of the business, our processes did not keep
pace.
"Following the discovery of the gap between the actual and forecast position, we chose to adopt a conservative approach, resulting in a longer than expected period of suspension from trading. However, this has allowed iiNet to fully review its systems, its financial results and forecasts to ensure that there is no repeat of this situation."
iiNet is on track to complete the strategic review of the business by the end of June 2006 and updated guidance on the 2007 financial year will be provided at the conclusion of that process.
The company will conduct an investor roadshow across Australia next week.
PowerTel was established in August 1998 with the purchase of Spectrum Global Networks.
The company is a provider of infrastructure based data, voice and internet services in Australia and owns its own telecommunications network on which it supplies telecommunications services to the Australian market.
Earlier this month PowerTel said it would achieve net profit excluding abnormal items for the half year to June 30 2006, a first for the company.
It expects to achieve its first half revenue guidance of between $98 and $101 million and exceed the top of the EBITDA guidance range of between $15 and $17 million.
In April, PowerTel launched its upgraded national VoIP offering, as part of its multi-million investment in providing channel partners and wholesale business partners with high quality telecommunications solutions.
At market close, shares in PowerTel were up 2 cents to $1.21. The company has a market capitalisation of approximately $169.8 million.
Below are the ASX announcements:
IINET & POWERTEL FORM STRATEGIC ALLIANCE
PowerTel, the business and wholesale telecommunications provider and iiNet, the
third largest Internet Service Provider in Australia and New Zealand, have formed a
strategic alliance.
Under the strategic alliance PowerTel has committed to a 14.9% placement in iiNet,
based on current issued capital.
In addition, iiNet will provide PowerTel with access to its network under an exclusive
wholesale arrangement and PowerTel will provide iiNet with wholesale network
services.
The strategic alliance provides PowerTel and iiNet with significant coverage in
regional centres and all major metropolitan capital cities around the country through,
effectively, the second largest access network in Australia.
PowerTel Managing Director, Paul Broad, said the new alliance with iiNet would
accelerate the company's access network roll-out by two years with minimum capital
outflow and eliminating network duplication.
"This strategic alliance has significantly accelerated PowerTel's progress in the
wholesale consumer, small business broadband and voice markets. This will bring
forward more than $10M in revenue growth for PowerTel and its wholesale
partners."
iiNet Managing Director, Michael Malone said, the combined national IP network
with 262 exchanges today, will offer iiNet, and PowerTel's wholesale customers,
competitive broadband and voice products, enabling them to compete against
Telstra and Optus without having to build a network.
"PowerTel already has a substantial nationwide network, while iiNet has the largest
high speed ADSL2+ network in the country".
"This strategic alliance will give iiNet economies of scale and therefore improve the
return on our network. It will also finally give other ISPs and Australian consumers
an opportunity to get access to real broadband speeds, rather than waiting for the
incumbent" said Mr Malone.
"PowerTel is a large and successful wholesaler already, with existing sales and
support facilities and a well established customer base," said iiNet Executive
Chairman Peter Harley. "We believe that PowerTel is far better positioned to drive
wholesale sales nationally and enable iiNet to leverage the value of its network."
Mr Broad said PowerTel would continue with its successful strategy of not competing
against its wholesale channels. As a result, iiNet, ISP's and Voice Resellers will
have a true alternative that won't undercut them at the retail level.
"There is considerable demand already from ISPs and with the increased coverage
we will be the logical choice for all voice direct-connect resellers and ISPs expect
this will now increase as a result of our alliance." Mr Broad said.
PowerTel will be issued up to approximately 16.36 million shares in iiNet at 85 cents
per share cash. The issue will occur in two tranches, and the second tranche of
approximately 3.76 million shares is conditional on various matters principally the
satisfactory conclusion of certain operational arrangements between the parties and
iiNet share price not trading below 75 cents for 10 consecutive trading days before
their issue which is expected to occur no later than 22 August 2006. PowerTel will
have the right to appoint one director to the iiNet Board following completion of the
first tranche, which is expected to occur on 5 June 2006.
PROFIT UPDATE:
iiNet Limited (ASX: IIN) today announced its revised EBITDA guidance for the year
ending 30 June 2006. iiNet is now expecting an EBITDA result of $24.6 million, before
any abnormal items, down from the previous guidance of $40.1 million. Revenues are
forecast to be approx. $250 million. Whilst still strongly EBITDA positive, the Company
expects to report a net loss for the year after amortisation and depreciation.
Based on recent trading and the budgeted result for the next three months the
Company is currently operating at a normalised run rate of $25m EBITDA per annum.
Due to several one off costs incurred since January and improvements in the network
cost base, the Company believes this level of EBITDA is the most accurate reflection of
the current profitability of the business.
"We are extremely disappointed to report this downgrade," said Managing Director
Michael Malone. "There are a number of reasons that have combined in this half to
produce a result that is significantly less than our market guidance and we attach a
detailed analysis."
"We recognise that this situation is unsatisfactory for shareholders, but the Company
remains in a good position, with over 600,000 services and Australia's largest ADSL2+
network."
Executive Chairman Peter Harley said that the issues with iiNet's financial position had
not been identified early enough.
"iiNet has been through a period of rapid growth in the last few years, including the
acquisitions of iHug in New Zealand and OzEmail in Australia, resulting in iiNet now
being the third largest internet service provider in Australia and New Zealand," said Mr
Harley.
"In every other six month period since 2001, there has been either a large acquisition or
a major integration. This is the first clear period without such activity and it is now
obvious that, with the rapid expansion of the business, our processes did not keep
pace."
"Following the discovery of the gap between the actual and forecast position, we chose
to adopt a conservative approach, resulting in a longer than expected period of
suspension from trading. However, this has allowed iiNet to fully review its systems, its
financial results and forecasts to ensure that there is no repeat of this situation."
The Company's bankers have been kept fully informed of the Company's position. The
Company is not in breach of its banking covenants and expects to meet future covenant
requirements.
The Company is on track to complete the strategic review of the business by the end of
June 2006 and updated guidance on the 2007 financial year will be provided at the
conclusion of that process.
iiNet will conduct an investor roadshow across Australia next week.
