Ihug sold for $82 million

11.36am - By PETER GRIFFIN

The country's third largest internet provider, ihug, has been sold to Australian internet company iiNet in a cash and share sale valued at A$72 million ($81.9 million).

Negotiations between iiNet, a fast growing internet provider founded in Perth in the early nineties, and ihug have been under way for some time.

The cash component of the deal is worth A$30 million with the balance made up of the issue of 24 million iiNet shares at A$1.75 per share to ihug's shareholders
who include founders Nick Wood and Tim Wood, John Wood, Bart Kindt and CallPlus owner Malcolm Dick.

iiNet shares on the Australian Stock Exchange closed last night at around the A$2.50 mark.

With news of the acquisition is clear confirmation for the first time of the size of the internet provider's business. ihug is generating annual revenue of A$48 million from its 170,000 customers on both sides of the Tasman. ihug also appears to be a relatively profitable company. It had annualised EBITDA (earnings before interest, tax, depreciation and amortisation) of A$17.8 million for the June quarter. Net profit after tax for the quarter was A$10.8 million. iiNet has annual revenue of around A$40 million.

iiNet will fund the cash component of the sale through a placement of shares at $2.05 per share.

Together iiNet and ihug will have more than 300,000 customers.

The acquisition still has to be voted on by iiNet shareholders at a special meeting and will require New Zealand Commerce Commission approval.

The deal is expected to be wrapped up in late October.

ihug's management have long been in search of a sale. 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 after intensive negotiations.

With ihug growing strongly on the east coast of Australia and iiNet number two in the Australian ADSL market, the companies are calling the merger a good fit.

Both iiNet and ihug have well established customer bases in dial-up markets and both are rapidly growing their broadband products and services. Ihug also has a competitive voice business, which is an area that iiNet has long been keen to expand," said iiNet's managing director, Michael Malone in a statement.

Both brands are expected to be maintained should the merger go ahead.