ihug sale likely to spark more ISP consolidation

Mark Rushworth's company has been of interest to several parties. Picture / Richard Robinson

The sale of New Zealand's third-largest internet service provider, ihug, is likely to spark more consolidation in the sector.

Orcon - self-described as the country's fourth-biggest ISP - wants to buy ihug to create the country's second-biggest provider.

Industry figures believe there will be a high level of interest in the company after the Government's unbundling decision announced in May.

With more than 500,000 customers, Telecom's xtra is the biggest ISP by subscribers, followed by TelstraClear, with around 200,000 customers. The Mark Rushworth-led ihug has 120,000 customers.

Parent company iiNet said the decision followed several unsolicited approaches to buy ihug. Vodafone and overseas companies such as Optus were tipped as possible buyers.

iiNet expected interest from private equity investors here and abroad in a deal likely to be finalised by the end of the year.

Orcon operations and regulatory general manager Scott Bartlett said iiNet's announcement followed months of talks about its New Zealand operation. He said buying ihug would give Orcon the scale to compete more effectively in the broadband market.

Vodafone and TelstraClear would not comment on the possibility of acquiring ihug.

iiNet director and ihug chairman Keith Goodall said ihug was performing well and growing solidly.

"Over the last 12 months, the new management team has overhauled the product line up, re-energised the brand and reduced operating costs," he said.

"As New Zealand's largest wholesaler of ADSL broadband, ihug has the scale to take advantage of local loop unbundling and has already announced its intention to deploy its own network once access to Telecom's exchanges is permitted."

Perth-based iiNet, Australia's third-largest ISP, voluntarily suspended trading for five weeks this year after discovering accounting and clerical errors that resulted in a downgrade to its profit forecast.

It bought ihug's Australasian operations for $81 million in 2003 but it is selling only the NZ operation.

IDC analyst Chris Loh said the telco sector overhaul meant it was a good time for iiNet to sell ihug.

He said the move was notable because of ihug's size. He added that further consolidation in the sector was possible because of the move from high profitability dial-up services across to low-margin broadband.

ihug was also well positioned to cash in on the "massive transformation" of voice-over-internet services.