Four-year wait ends with $81m sale for ihug

By PETER GRIFFIN IT writer

The price tag was well short of dotcom bubble excess but internet provider Ihug has achieved its founders' goal, selling for $81 million to listed Australian company iiNet.

Brothers Nick and Tim Wood, who started the Auckland company nine years ago with an $8000 loan, have been trying to cash up their investment since 1999 - a year before the tech wreck.

But management of both companies refer to the sale as a merger, saying there will be no redundancies or side-lining of New Zealand management.

The cash component of the deal is worth A$30.1 million, the balance made up of the issue of 23.7 million iiNet shares at A$1.75 a share to ihug's shareholders, who include the Wood brothers, their father John Wood, Bart Kindt, CallPlus owner Malcolm Dick and Deep Blue Corporation.

Shares in iiNet jumped 31Ac to close at A$2.81 when trading on the Australian Stock Exchange resumed after a freeze last week. Some of the new iiNet shareholders are understood to face restrictions on when they can sell their shares.

IiNet chief financial officer Clayton Hollingsworth said the company would seek a listing on the New Zealand Exchange once the merger had bedded in.

With news of the acquisition came the first clear confirmation of the size of ihug's business.

It is generating annual revenue of A$48 million from its 170,000 customers on both sides of the Tasman and had annualised ebitda (earnings before interest, tax, depreciation and amortisation) of A$17.8 million. Annualised net profit after tax was A$10.8 million. IiNet's annual revenue is about A$40 million.

Nick Wood, who stepped back from active management at ihug a year ago and now owns a hotel resort in Fiji, said the sale was essential to keep ihug competitive.

Together iiNet and ihug will have more than 300,000 customers, revenue of more than A$100 million a year and 330 staff.

IiNet will fund the cash component of the sale through a placement of 14.9 million shares at A$2.05 a share. Hollingsworth said the underwritten share offer was fully subscribed.

IiNet's interest in ihug appears to centre on the latter's successful telephone tolls business, which has 23,000 customers. IiNet has no telephony business but is making ground in the market for high-speed internet, notching up 30,000 customers. Ihug has 11,000 broadband customers.

Post-merger, 30 per cent of iiNet will be New Zealand owned, 20 per cent by the Wood family.

Nick Wood said the sale was not an exit strategy for the Wood family.

"We're very much on board and keen to see where things go next."

In 1999 ihug was in negotiations with Sky in a deal worth $35 million. A deal with cinema and property giant Force Corporation in 2000 reportedly worth $120 million, also collapsed.

The acquisition still has to be voted on by iiNet shareholders and will require New Zealand Commerce Commission approval. The deal is due to be concluded by November.

The ihug story

August 1994 - brothers Nick and Tim Wood set up the Internet Home Users Group (ihug) with a Commodore 386 PC and a loan of $8000 from their father, John.

March 1995 - launch of $39-plus-GST a month flat-rate internet access.

September 1996 - acquires Christchurch-based internet provider ESNet.

August 1998 - sets up online travel service travelonline.co.nz, launches satellite-based internet access service.

March 1999 - bills 99,000 dial-up customers an average of $32 each a month. Earnings before interest, tax and amortisation of $3.5 million. Signs interconnect agreements with Telecom, World Exchange and Clear to deliver cut-price toll calls.

July 1999 - Sky TV announces plans to buy 30 per cent of ihug for about $30 million. The Wood family makes the National Business Review annual Rich List, with an estimated wealth of $75 million.

September 1999 - Sky drops its plans to buy a 30 per cent stake. ihug spends $3 million launching a digital TV service, but after three months has only 50 subscribers.

February 2000 - Tappenden Holdings, the investment vehicle for Alan Gibbs and Trevor Farmer, completes purchase of a 10 per cent stake in ihug reportedly for $10 million. Force Corporation proposes to issue 210 million shares to buy ihug, valuing the company at $120 million.

April 2000 - sharemarket turmoil blamed for ending Force Corporation's acquisition of ihug.

October 2000 - announces 60 staff redundancies.

May 2001 - CallPlus chief executive Malcolm Dick buys 10 per cent stake from Tappenden Holdings.

August 2002 - Nick Wood steps down from day-to-day running of ihug and moves to Fiji to run his Octopus Resort. Martin Wylie the new chief executive.

September 2003 - iiNet buys ihug for $81 million.