Examine the takeover of Internode Pty Ltd by iiNet Ltd

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Takeover of

Internode Pty Ltd

by iiNet Ltd


Unit Title: Corporate Accounting and Reporting

Tutor’s Name:

Word Count: 2200

Table of Contents

Executive summary…....…………………………………………………………………………3

1 Introduction………………………………………………………………………………3

2Background of the takeover…..........................................................................................4

2.1Information of the takeover.................................................................................................4

2.2Comparison between the operations of iiNet and Internode ……….……………………..4

3Details of the takeover….…………………………..……………………………………5

3.1Purchase consideration….....................................................................................................5

3.2Transaction costs related to the takeover......………….......………………………………5

3.3Acquisition difference……………………………………………………………………..5

3.4Disclosure requirements …..................................................................................................6

3.5Takeover of TransACT……………………………………………………………………7

4Impacts of the takeover.................................................................................................…8

4.1Impact on iiNet’s share price……………………………………………………………...8

4.2Impacts on iiNet’s financial position and performance...…………………………...…….9

5Conclusion……………………………………………………………………………....10

6References………………………….……………………………………………………10

7Appendix…………………………………………………………………………….…..11

8 Acronyms………………………………………………………………….…………….15

Executive Summary

The purpose of this report is to identify the impacts brought by the takeover of Internode to iiNet in terms of financial position and performance. First of all, Chapter 2 shows the information of the takeover and the comparison between the operations of both companies. Chapter 3 not only explains the purchase consideration, transaction costs, acquisition difference and disclosure requirements for the takeover, but also contrasts the acquisitions between Internode and TransACT.

Most importantly, Chapter 4 highlights the effects of the takeover on iiNet’s financial position and performance as well as market share price. iiNet performed well below expectation for the overall financial ratios, namely liquidity, profitability and leverage ratios as its liabilities were pushed up substantially. Nevertheless, iiNet had slightly better performance on its investment valuation ratios with higher earnings. Last but not least, Chapter 5 suggests the acquisition of Internode was disadvantageous to iiNet in short term due to poor contribution to financial ratios, yet it was believed to create more benefits in the future.

1. Introduction

As the Australian largest privately owned broadband company, Internode joined forces with iiNet on 31 January 2012. This report analyses and explains the impacts of the takeover on iiNet’ financial position and performance. In addition to that, specific information of the acquisition is provided in the report.

2. Background of the takeover

2.1 Information of the takeover

2.1.1 Takeover of Internode

On 22 December 2011, iiNet proclaimed the acquisition of 100% shares in Internode for a deal of $105 million. The acquisition comprised 190,000 broadband customers and 260,000 active services for iiNet (iiNet 2011). Subject to satisfactory procedural conditions, the takeover was finalised by 31 January 2012, a month earlier than expectation which was 29 February 2012.

2.1.2 Reasons for the takeover

According to iiNet’s 2012 preliminary financial report, the primary reason for the takeover was to increase its market share in the residential and corporate telecommunication sectors and to cement its market position as the dominant challenger brand by merging with Internode with great cultural coordination, industry superior customer service, and shared passion and dedication to innovation. The acquisition targeted to expand iiNet’s presence in South Australia and Eastern states market. Furthermore, the transaction aimed to reinforce iiNet’s strategy of extending its network scale for the inception of NBN market (iiNet 2011).

2.2 Comparison between the operations of iiNet and Internode

Prior to the takeover, iiNet and Internode possessed identical backgrounds, cultures, values and service ethics. As the internet service providers, both companies owned similar financial and customer profiles. They were the industry leaders in customer satisfaction with their intense focus on customer service. iiNet’s business was mainly in Western Australia, distinct from Internode that operated in South Australia and Eastern states. iiNet and Internode had different product focuses which were ADSL-based internet services and broadband services respectively. In fact, they were compatible as the market leaders due to the differences above. Moreover, the differences indicated both companies were complementary to each other in terms of geography and business service base (iiNet 2011).

3. Details of the takeover

3.1 Purchase consideration

The cost of acquisition was $105 million as claimed by iiNet in the announcement. However, the actual purchase consideration was $108,441,000 in accordance with Note 30 of iiNet’s 2012 annual report. Part of the takeover was financed through the issue of 12,072,664 iiNet shares worth of $36,218,000, constituting 7.5% ownership post-issuance in the company. The balance of $72,223,000 was funded in cash net of Internode’s liabilities, available from cash on hand and supplement of iiNet’s bank loan facility. Additionally, Internode accepted the conditions set on an attached Share Purchase Agreement for 12 months. Under standstill provision, Internode was prevented from purchasing or soliciting iiNet shares further than 7.5% of the share capital. In compliance with tender provision, Internode consented to tender its shareholding into any takeover offer, arrangement scheme or other merger proposed by a simple majority of iiNet board (iiNet 2011). The takeover was performed in this approach since the industry rival TPG that was reportedly poised to acquire iiNet, raised its equity stake to 7.24%. Therefore, this strategy was implemented to defend iiNet from being targeted by TPG (Renai 2011).

3.2 Transaction costs

As specified in Note 30 of iiNet’s 2012 annual report, the direct transaction costs of $2,017,000 related to the acquisition of Internode were recorded as the Administrative and Other Expenses in the Statement of Comprehensive Income for the year ended 30 June 2012.

3.3 Acquisition difference

By referring to Note 30 of iiNet’s 2012 annual report, goodwill of $87,189,000 was accrued from the takeover of Internode. The amount of goodwill was computed to be the difference between the purchase consideration of $108,441,000 and the fair value of identifiable net assets from Internode amounted to $21,252,000. Goodwill was recognised as non-current asset in the Consolidated Financial Statements presented by iiNet for FY2012.

3.4 Disclosure requirements

AASB 3-Business Combinations and AASB 127-Consolidated and Separate Financial Statements required additional disclosures from iiNet upon the takeover of Internode.

3.4.1 AASB 3-Business Combinations

Under paragraph 59, iiNet was required to publish the information that allowed users of its financial statements to assess the nature and financial effect on the acquisition of Internode which occurred during FY2012. According to paragraph 60, iiNet must present the following details stated in paragraph B64 in order to fulfil the aim of paragraph 59:

  • The name and a description of Internode.
  • The acquisition date.
  • The percentage of voting ownership interest obtained.
  • The key reasons for the takeover of and description of method to gain control in Internode.
  • A qualitative explanation of the factors that generated the recognition of goodwill.
  • The fair values of total consideration and each major category of consideration at the acquisition date.
  • The fair value, gross contractual amounts and estimated uncollectible amounts of each important class of receivables acquired.
  • The presumed amounts of every major class of assets and liabilities at the acquisition date, which were normally calculated at fair values.
  • The total value of goodwill which was estimated to be tax deductible.
  • The fair value of iiNet’s interest in Internode immediately before the acquisition date
  • Any gain or loss amount in consequence of revaluing iiNet’s equity interest to fair value, and its recognition in the line item under the statement of comprehensive income.
  • The amounts of revenue and profit or loss from Internode since the control date, which were included in the consolidated statement of comprehensive income for FY2012.
  • The revenue and profit or loss of the group entity as it would be had all new business combinations at the beginning of FY2012 (Jubb, Langfield-smith, Haswell 2009).

In accordance with paragraph 61, iiNet should report the necessary information that enabled users of its financial statements to measure the financial effects of adjustments during FY2012 about the takeover of Internode. Under paragraph 62, iiNet was obliged to disclose a reconciliation of goodwill that consisted of the carrying amounts at the beginning and end of FY2012, and additional goodwill provided from the acquisition of Internode in conformity with paragraph B67 for the objective of paragraph 61.

3.4.2 AASB 127- Consolidated and Separate Financial Statements

Under paragraph 43, iiNet as parent company that issued the separate financial statements should make the disclosures below in the notes:

  • The fact that the statements were separate financial statements.
  • A list of shares in Internode, including the name, country of incorporation or residence, its ownership interest and voting power.
  • An explanation of the method used to account for the shares, and a clarification that the separate financial statements were prepared under paragraph 9 where iiNet was required to comply with the specified procedures in preparing consolidated financial statements.

3.5 Takeover of TransACT

iiNet announced to acquire TransACT with 100% shares on 21 November 2011. On 30 November 2011, the transaction was completed for $60 million, less than the offer on the acquisition of Internode. One of the main differences between this takeover and that of Internode was to lubricate iiNet’s appearance in SME, corporate and government sectors by contributing 40,000 subscribers across residential and these market segments with more than 140,000 products. The acquisition provided iiNet with different opportunity to grow its business scope to ACT and regional Victoria (iiNet 2011). Unlike the acquisition of Internode, the consideration for the takeover was paid only in the form of $60,700,000 cash from iiNet’s cash and debt facilities. Besides, gain on bargain purchase of $3,279,000 arose from the acquisition instead of goodwill, from the difference between the purchase consideration of $60,700,000 and the fair value of identifiable net assets of $63,979,000 acquired in TransACT (iiNet 2012).

4. Impacts of the takeover

4.1 Impact on iiNet’s share price

Each iiNet’s share was valued at $2.86 on 22 December 201l where the acquisition of Internode was announced. iiNet’s share price increased by $0.10 to $2.96 on the next day, 23 December 2011. The announcement affected iiNet’s share price to grow despite of following the usual instances. One of the reasons behind was instead of goodwill, investors believed gain on bargain purchase was generated to iiNet on the net worth of Internode. The strong brand name of Internode was another clear factor to push up iiNet’s share price. Being in line with iiNet’s strategy for NBN, the takeover produced a good market sentiment to investors. Investor sentiment continued to be more positive for the deal as iiNet’s national footprint will be strengthened with significant position in South Australia and Eastern states. As a result, the increase in iiNet’s market share further convinced the investors. For the interests of investors, the takeover set iiNet to be the second largest DSL broadband provider and the third top internet service provider in Australia.

4.2 Impacts on iiNet’s financial position and performance

4.2.1 Financial position

As stated in iiNet’s Consolidated Statement of Financial Position, the total assets increased by $300,033,000 from $456,477,000 to $756,510,000. The amount of iiNet’s total liabilities increased from $213,971,000 to $469,861,000 by $255,890,000. Thus, there was an increment of $44,143,000 in iiNet’s net worth from $242,506,000 to $286,649,000.

4.2.2 Financial performance

For the FY2012, the value of iiNet’s total revenue increased by 18.90% from $699,086,000 to $831,225,000. iiNet had EBITDA up 12.50% from $129,808,000 to $146,029,000 and EBIT up 42.26% from $56,637,000 to $80,571,000. Consequently, iiNet generated 11.03% more on net profit after tax to $37,054,000 from $33,374,000.

4.2.2.1 Liquidity ratios

The liquidity performance of iiNet was worse off due to larger increment in current liabilities compared to current assets. iiNet had current ratio reduced by 4.35% from 56.33% to 51.98%. In addition to that, its cash ratio had slight decrement of 1.37% from 5.18% to 3.81%.

4.2.2.2 Profitability ratios

iiNet’s gross profit margin was up 5.17% from 37.40% to 42.57%, but its net profit margin slightly worsened from 4.77% to 4.46% by 0.31%. Moreover, iiNet performed unfavourably on both return on assets and return on equity ratios. The return on assets ratio had minor decrease of 1.96% from 8.07% to 6.11%, while its return on equity ratio was insignificantly down 0.07% from 14.07% to 14.00%.

4.2.2.3 Leverage ratios

The takeover of Internode had the most substantial impact on iiNet’s leverage ratios because of great increment in total liabilities. IiNet showed poor performance on debt to assets ratio with increase of 15.24% from 46.87% to 62.11%. On the other hand, the debt to equity ratio presented the worst result from iiNet that got up 77% from 88% to 164%. iiNet also had interest coverage ratio increased from 17.60% to 21.80% by 4.20%.

4.2.2.4 Investment valuation ratios

iiNet improved its basic earnings per share from 22.0 to 23.9 by 1.9 cents, as well as diluted earnings per share from 21.9 to 23.9 by 2.0 cents.

5. Conclusion

Hence, all in all, the takeover of Internode was unfavourable to iiNet due to the weak results on many main aspects of financial ratios. The decrease of liquidity ratio indicated iiNet’s risk in repaying current liabilities, whereas the decline in profitability ratio identified iiNet’s higher expenses, but the reduction in both ratios was insubstantial. The significant raise of leverage ratio explained iiNet’s further uncertainty in covering its debts which attracted additional interest expenses. However, the acquisition was advised to be beneficial in long term as iiNet had decent financial performance with 18.90% growth in revenue and 11.03% increment in net profit after tax during FY2012.

6. References

iiNet 2011, iiNet to acquire Internode, viewed 20 April 2014, <http://www.iinet.net.au/about/mediacentre/releases/20111222-iinet-to-acquire-internode.pdf>.

iiNet 2012, Preliminary Financial Report and Appendix 4E for the Year Ended 30 June 2012, viewed 20 April 2014, <http://www.afr.com/rw/Wires/Stories/20120816/ASXAnnouncements/IIN_01323356.pdf>.

iiNet 2012, Annual Report 2012, viewed 20 April 2014, <http://investor.iinet.net.au/IRM/Company/ShowPage.aspx?CPID=1654&EID=32307081>.

Renai, L 2011, ‘iiNet to buy Internode’, Delimiter, 22 December, viewed 20 April 2014, <http://delimiter.com.au/2011/12/22/iinet-to-buy-internode/>.

iiNet 2011, iiNet acquires TransACT, viewed 20 April 2014, <http://www.iinet.net.au/about/mediacentre/releases/20111130-iinet-acquires-transact.pdf>.

Australian Accounting Standards Board [AASB] 2013,AASB 3 Business Combinations,Canberra, viewed 20 April 2014, <http://www.aasb.com.au>.

Australian Accounting Standards Board [AASB] 2013,AASB 127 Consolidated and Separate Financial Statements,Canberra, viewed 20 September 2013, <http://www.aasb.com.au>.

7. Appendix

8. Acronyms

Abbreviation/ acronym

Name

Internode

Internode Proprietary Limited

iiNet

iiNet Limited

TransACT

TransACT Capital Communications

NBN

National Broadband Network

TPG

TPG Telecom Limited

FY2012

Financial year 2012

ADSL

Asymmetric digital subscriber line

AASB

Australian Accounting Standards Board

DSL

Digital subscriber line

Takeover of Internode Pty Ltd by iiNet LtdPage 1

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