Online mobile service provider Amaysim Australia Ltd (ASX: AYS) today announced that it has entered into an agreement to acquire Australian Broadband Services Pty Ltd (AusBBS).

The purchase price is $4.0 million in cash and shares plus a maximum earn-out of $5.5 million depending on subscriber growth and profitability up to three years following completion.

Amaysim is expecting a high level of customer churn in the broadband industry over coming years as subscribers switch to the NBN. The company is hoping to take advantage of this and sees the acquisition of AusBBS as a way to accelerate the launch of its own broadband offering.

Founded in 2012, AusBBS has built a scalable IT platform for servicing and managing ADSL and Broadband subscribers. Amaysim will use this system to sell broadband to its existing mobile as well as to prospective customers and so the acquisition looks like a sound strategic move by the company.

More than a low cost model

Amaysim aims to outcompete the major telecoms providers like Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) by having the lowest customer acquisition and service costs in the industry. As an online retailer offering a sim only service, Amaysim has a flexible and low cost business model.

Not only do Amaysim’s customers benefit from competitive prices with a typical plan costing about $30 per month, they also have the freedom to leave whenever they choose as all plans are on a month by month basis. It is no wonder that between October and December 2015 the company received just 0.7 complaints per 10,000 customers.

Amaysim has developed a user friendly online self-service model which enables customers to automatically port numbers and transfer sims without speaking to support staff. The platform is increasingly popular and in the first half of 2016, 43% of activations came through online channels despite the company’s large network of retail partners.

Unlike the larger industry players, Amaysim does not own any network infrastructure. Instead it has a five-year agreement to access the Optus network which ensures that Amaysim’s customers are provided with the same level of coverage as Optus subscribers.

Should Optus decide to cease dealing with Amaysim at any point in the future then the company would have to find an alternative network provider. However, wholesale agreements such as the one with Amaysim represent an easy way for Optus to leverage its network without having to spend money acquiring and servicing subscribers.

Although Amaysim is the fourth largest mobile service provider, its subscriber base still only represents 2.6% of the total market. It may take some time before it grows large enough to pose a real threat to the majors but I suspect that the emergence of companies like Amaysim signals the start of declining mobile and broadband prices for consumers.

Not growing fast enough?

Shares in Amaysim dropped 30% shortly after the company announced its 2016 half year results in February. However, it was hardly a bad report with pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) up 173.9% to $12.6 million and a 12.5% growth in subscribers to 764,000 over the prior year.

Perhaps this was less than the market was expecting as it implies Amaysim will need to deliver underlying EBITDA of $19.1 million for the second half of the year in order to reach its prospectus 2016 full year forecast of $31.7 million.

But the company reconfirmed this guidance in May and indicated it expects Vaya Group, acquired in January 2016, to contribute an additional $3.3 million to $4.3 million in underlying EBITDA in the second half of the year.

Annualising forecast EBITDA for the second half of the year including the Vaya contribution implies an underlying EBITDA of at least $44.8 million in 2017. This is arguably conservative as it assumes no further organic growth or contribution from AusBBS.

Given Amaysim is a capital light business with no debt, net profit after tax (NPAT) could be around $30 million in 2017 before amortisation of acquired intangibles. Therefore, the current market capitalisation of $349.7 million seems like a very reasonable price to pay for the stock.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.