Orcon's $30m ihug bid rejected

A $30 million bid by Orcon for telecommunications company ihug has been turned down by its Australian parent, in what one analyst says is a sign internet companies have increased in value following Government reform of the industry.

Orcon chief executive Scott Bartlett said his company had made an offer of $30 million for ihug but had been knocked back.

"We thought it was a fair estimation of its worth but do not expect to be part of the process now," he said.

It is understood that iiNet has also rejected a $36 million bid from internet company Compass Communications for New Zealand's third largest internet provider.

The company was put up for sale by iiNet on July 20 and investment adviser Grant Samuel was appointed to advise on the sale.

TelstraClear, Sky and BCL are believed to be talking to iiNet over the sale - but did not want to comment yesterday.

IDC telecommunications analyst Chris Loh said ihug's value had risen since the Government announced in May it would open Telecom's networks to providers.

The company could expect better wholesale options for broadband services through improved access to Telecom's network under the regulation, said Loh.

The company had the most established and strongest ISP brand after Telecom's Xtra in New Zealand and was perhaps the best positioned in New Zealand to take advantage of the new environment.

It had positioned itself well for consumer voice over internet services and could expect high fixed-line revenue apart from Telecom in the next two years, Loh said.

Perth-based iiNet has been on an aggressive acquisition trail in Australia but suffered performance failings early in the year.

Also, it was reported yesterday that Telstra had slashed iiNet's payments for its debts from 50 days to 30 days. iiNet buys network services from Telstra.

Loh said low margins on broadband services, and better returns on fixed line voice services, were forcing internet providers to change to telecommunications companies.

Many smaller ISPs, such as ihug, would find the new environment challenging and benefit from being acquired by a larger provider with more technical and financial scale.

"Market consolidation can be expected to continue," said Loh.

The chief executive of ihug, Mark Rushworth, was unavailable for comment.