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iiNET does what Telstra couldn’t

In a bid to increase market share, South Australian internet provider Adam Internet has been snapped up for $60 million by iiNet (ASX: IIN).

This comes only two weeks after telecommunications heavyweight Telstra (ASX: TLS) was rejected by the ACCC for the same deal. Telstra’s offer was identical in value but the competition watchdog was concerned that it may have used Adam as a low-cost provider of services, undercutting its rivals like iiNet and TPG Telecom (ASX: TPM) by using favourable wholesale deals.

When Telstra made its original offer, iiNet said it was not prepared to pay the price, but in a statement yesterday, iiNet said Adam’s EBITDA was higher than expected and it had just invested in building a data centre, which means it is making money straight away. iiNet agreed to pay $60 million in cash for the provider, which currently boasts 70,000 customers.

Adam has forecasted 2014 revenue of $55 million and EBITDA of $11.5 million. The deal will take iiNET’s total number of broadband subscribers to 900,000 and allow it to control 30% of South Australia’s market and 15% of the nation.

Foolish takeaway

Telstra is now in a phase of consolidation amongst customers. It is focusing on retaining its huge share of both fixed broadband services and mobile devices but its renewed focus on customer service has seen it attracting more customers away from its smaller rivals. However, companies like iiNET and TPG will become more competitive on prices once the NBN is rolled out to more households because Telstra will not own the network and therefore must actively compete on price.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: “Is It Time to Sell Telstra?”

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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