Is undervalued Primus a dead telco walking?

After a decade and a half of telco competition, the sale of Primus' infrastructure for $192 million is a sobering reminder of how hard it is to build value in the sector.
Written by David Braue, Contributor

There are few better media strategies for setting the news agenda than dropping a bomb on journalists' desks first thing on a Monday morning. As the dust cloud from PTGi's surprise sale of Primus Telecommunications settles, it's clear that the move reflects a seismic shift in the local telecoms industry; whether it's a good sign or not remains to be seen.

One of the original contenders in Australia's deregulated telecoms environment, Primus has had its share of ups and downs. It started on an even footing with competition-era rivals like AAPT — and yet, even as fellow second-tier firms like iiNet, TPG Internet and Internode built up (or bought) loyal constituencies over the years, Primus never really dominated in the mass market.

Turns out new Primus CEO Tom Mazerski didn't just come to Australia for the koalas. (Credit: David Braue/ZDNet Australia)

Instead, it moved ahead with something of a split personality, simultaneously chasing what became about 165,000 retail internet customers and wooing business clients wanting tailor-made telecoms solutions. Recent, highly publicised wins with the likes of Payless Shoes, Hungry Jack's and Australian Power and Gas suggested that it was getting traction in that segment, which is great for telcos, because of the significant and recurring revenues it generates.

Despite its ambitions, however, Primus never really capitalised on its retail promise, falling behind its rivals in recent years and failing to elaborate a strong, long-term growth strategy apart from its ongoing investment in telecoms infrastructure. It had some good ideas, but, with the NBN looming as ubiquitous infrastructure competition, it must have been clear that the writing was on the wall.

Little wonder that new CEO Tom Mazerski was brought in last year, putatively ready to build the telco's fortunes — and declaring early on that he saw both threats and opportunities in the company's relationship with Telstra.

His underlying purpose, it is now clear, was to assess the viability of a post-NBN Primus. So, then: what are we to read into the fact that the company has subsequently been sold off? Does this mean that Mazerski concluded that there was no way for it to survive in the NBN era, and that he should realise as much of its value as possible before things got worse?

Extrapolating from iiNet's price of $531 per AAPT customer, we can assume that M2 has paid around $87.6 million for Primus' customers.

It's not much different to what happened a few years ago when Telecom New Zealand-owned AAPT, also a big infrastructure, small retail player, sheared off its retail business to focus its efforts on business customers.

At that time, Telecom New Zealand was said to be asking $300 million for the entire operation, but sold its 113,000 subscribers to iiNet for just $60 million. That values AAPT's infrastructure at around $240 million, which is far higher than the $192.4 million that M2 has paid for Primus, which has similar fibre infrastructure around the country, and is probably the closest extant analog to AAPT. Extrapolating from iiNet's price of $531 per AAPT customer, we can assume that M2 has paid around $87.6 million for Primus' customers, and around $105 million for its infrastructure.

That's an embarrassing figure for a company that booked around $280 million in revenue last year, and was once on a trajectory to become the next Optus or Telstra. The numbers must be chilling for industry watchers who argue that private investment can build long-term growth; after 15 years of investment, Primus' extensive infrastructure has been valued at just one tenth of the US$1 billion Facebook just paid for Instagram, a company with 13 employees and zero revenue.

The value of such sales are based on long-term projections about the ability of that infrastructure to generate an acceptable level of profit in the future — and the fact that neither AAPT nor Primus were able to get much for their fibre suggests one of two things: either laying fibre networks is a great way to squander capital, or the looming presence of the NBN truly has killed off the prospects for aspiring telcos in Australia.

Either way, it can't be good for the health of the overall sector that foreign investors have decided to repatriate Primus' Australian customers and operations and move on. It's a spanner in the works for ideas such as the one I floated recently, suggesting that we should welcome the overseas investment that the NBN could attract.

There are still opportunities for overseas providers in the NBN, but those opportunities do not, it appears, lie in building broad infrastructure; rather, they'll be leveraging the NBN to offer new service bundles for streaming video, next-generation communications, and the like. Global telcos will also find value in establishing local points of presence, but NBN will be the last-mile provider of choice.

The low value attached to Primus also confirms what NBN advocates have been saying for some time: that the private sector will never be able to build an adequate value proposition to support the construction and maintenance of extensive NBN-alternative infrastructure and egalitarian delivery of broadband.

Nope; it turns out that telco investors are actually focused on profits, and have decided that Primus isn't going to be able to deliver them, so it's best to take the money and run.

For players like iiNet — which has been acquisition hungry of late, and I would suspect could very well target M2 itself for acquisition — that presents great opportunities. But it's the last thing that smaller telcos wanted to hear. And, for everyone else, the next question is clear: is this a negative effect of the NBN, or a positive one?

Does it reflect the inherent strength of a ubiquitous wholesale network that will push telco operators farther up the food chain to focus on previously ignored things like customer service? Or is it the embodiment of everything that Tony Abbott's Liberals have been warning about — that the NBN will kill competition and stifle innovation in the telco sector?

The next question is clear: is this a negative effect of the NBN, or a positive one?

The answer is: a bit of both. It's clear, for example, that the NBN market will favour larger operators with the infrastructure to service a nationwide customer base — and that the prospects for the involvement of smaller ISPs may be limited, unless they can successfully focus on niche markets or geographical areas.

And yet, is this necessarily a bad thing? While it will change the market significantly, this shift should also result in greater competition amongst telecoms giants, who will use bundling and advanced services to win over customers — rather than breeding resentment and isolation by depriving them of basic communications services because there's no business case to do so.

Somewhere along this spectrum will be M2, which, by absorbing the Primus infrastructure and customer base, seems determined to position itself as a contender in the new market.

Whether it will succeed in its own right — or suffer death by a thousand cuts and end up in a customer and infrastructure fire sale a few years from now — remains to be seen. But M2's new owners, like its new CEO Geoff Horth, wouldn't have shelled out what they did without a good grasp of this market's history and full awareness of the NBN's implications. They will either turn M2 into a telecoms powerhouse, or milk it for profit and ignominiously strip off its assets as the NBN paints it into a corner.

What do you think? Is the Primus sale a concession of defeat at the hands of the NBN? Or does it open up new possibilities for M2?

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