Pipe Networks sell-out an absolute travesty

Summary:The proposed buyout of Pipe Networks by SP Telemedia is an absolute travesty for Australia's telecommunications industry and will be overwhelmingly negative for customers, Pipe Networks staff, shareholders and the industry as a whole.

ZDNet.com.au news editor
Renai LeMay

(Credit: CBS Interactive)

commentary Let me be the first to condemn the proposed buyout of Pipe Networks by SP Telemedia as an absolute travesty for all concerned and Australia's telecommunications industry in general.

There is so much about this outrageous deal that will be negative for customers, Pipe Networks staff, shareholders and the industry as a whole, that it's hard to know where to start.

But let's begin with the fact that Pipe Networks founders (and school mates) Bevan Slattery and Steve Baxter built their company up from the ground as a staunchly wholesale player serving a cut-throat market dominated by retail internet service providers.

Since 2002, Pipe has shone like a diamond in the rough in the Australian telco market by virtue of the fact that it has refused to play favourites and has offered its peering and fibre services equally to the whole tranche of Australian ISPs (although it does also have some big business and government customers).

The impact that this has had on an industry formerly dominated by large players such as Telstra, Optus and AAPT has been phenomenal.

Behind the scenes, it has been partially due to Pipe's hidden hand that ISPs like iiNet, Internode and Netspace have been able to rise up and challenge the majors in the way they have. The DSLAM broadband networks that such ISPs have built have often been fuelled by waves of backhaul access provided by Pipe at a significantly better rate than Telstra and others have chosen to offer.

The deals that Pipe and these ISPs have inked over the years — including the ones to get its PPC-1 cable off the ground — are legend in the industry, and they should be. They helped to create the ADSL2+ services consumers and businesses enjoy today.

The heroes of Pipe Networks appear to now be handing over ... their bouncing baby boy to one of the industry's villains

All this will change following the SP Telemedia transaction, due to the fact that the merged entity will now become a vertically integrated telco in the style of Telstra (and we've seen how well that has worked out).

Customers like iiNet may claim to be comfortable with the deal today, but down the track, who can tell what impact SP Telemedia's management will have on Pipe's wholesale operations?

At the very least, I predict that the deal will dilute Pipe's focus on its wholesale operations, as its network is more tightly bound to SP Telemedia's and increasingly used to fuel the company's retail ambitions with its own TPG and Soul ISPs.

In the worst case, the glorious fibre network that Pipe's loyal staff have spent the last decade building will simply be subsumed into SP Telemedia's wider assets and wholesale customers given the boot. At that point Telstra will probably heave a sigh of relief and re-visit its pricing strategy.

The next awful impact of the deal will be felt by Pipe's loyal and hard-working staff, many of whom will be shocked and appalled this week as they witness Pipe's management hand over the open and friendly company they have worked so hard to build from the ground up to an executive like SPT chairman David Teoh.

As Communications Day wrote this morning, Teoh is renowned in Australia's telecommunications industry as "its most frugal and reclusive CEO", sentiments I wholeheartedly echo. I have always found it virtually impossible to get information from SP Telemedia and TPG about their operations.

In addition, you don't have to go far to find stories of Teoh (and TPG, which he sold to SPT in early 2008) outsourcing Australian jobs to South-East Asia or fighting running battles with third-party dealers.

Furthermore, TPG has an appalling reputation for customer service, while Pipe arguably has one of the best. When I was foolishly a TPG customer back in the early years of this decade, on one memorable occasion I spent many hours simply attempting to connect to a call centre operator to cancel my account.

From memory, I eventually gave up and sent the company a letter ... on paper. Through Australia Post.

In comparison, Pipe has long been known for its friendly treatment of staff (with a "work hard, play hard" engineering-style ethos) and the generous spirit in which it relates to the rest of Australa's telco industry. The company often sponsors events, talks openly about issues and is known generally as a haven of common sense and decency.

In short, you couldn't imagine two more opposite company cultures than Pipe Networks and SP Telemedia. I would advise all Pipe Networks staff to start considering their futures with the company immediately. Because if you're not, don't worry — David Teoh will be.

No doubt these sorts of issues will be mulled over at Pipe's Christmas party, reported to be this evening.

One of the ironies of the proposed buyout is that it arguably isn't even a good deal for Pipe's shareholders.

Many of those shareholders have made a motza from Pipe since the company listed on the ASX back in May 2005 at a meagre 40¢. The company is now trading slightly above $6, a 1500 per cent return on initial investor's money. And there's a good reason why.

As Pipe's own website states, the company "has been profitable each and every year of operation" and has experienced record growth both in terms of revenue and profits. There is also significant reason to believe in Pipe's future success as an independent company, given the recent launch of its flagship undersea fibre link to Guam, a project that truly propels it into the ranks of Australia's most important carriers.

"Project Runway" indeed — if Australia's internet data demands continue growing at the rate they have been for several decades (and they are likely to, given the National Broadband Network build), investors can expect a pot of gold at the end of the tarmac.

As one ZDNet.com.au commenter pointed out yesterday, SP Telemedia's offer, at a 15 per cent premium to its average price over the past few months, but only a 4 per cent premium to its current price, is almost laughable.

One of the ironies of the proposed buyout is that it arguably isn't even a good deal for Pipe's shareholders.

Pipe Networks has a golden future ahead of it as an independent company. With active and enthusiastic shareholders, many of whom are already protesting the deal, the company should push to maintain the status quo rather than sell itself short.

Even if it didn't ... if the company is serious about looking for suitors, I would argue that there are likely better buyers out there who could offer more to shareholders, staff and customers than SP Telemedia. I would be surprised, for example, if a few deep-pocketed private equity firms haven't already run the ruler over Pipe from time to time, especially given the recent buyouts of other local technology groups MYOB and Mincom.

Yesterday, iiNet chief Michael Malone congratulated Slattery and Baxter for achieving what he described as "an attractive exit price" after their "ballsy" years leading the Australian telco industry.

Yet the fact remains that the pair are already multimillionaires, and have been since their initial public offering four and a half years ago. Instead of being elated by the pending sale, I am betting that both Slattery and Baxter instead right now have that sinking feeling of being called to the principal's office.

After running their own "ballsy" operation for most of a decade, and as Malone put it, changing the landscape of Australian telecommunications forever, the heroes of Pipe Networks appear to now be handing over the teenage years of their bouncing baby boy to one of the industry's villains.

Topics: Telcos, TPG

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