TPG gets some Soul

Soul Telecom seems to be suffering some form of value decline, at least on the sharemarket, where in little less than a year, they have gone from being $1, to close to $0.25, losing 75% of the share value.

They recently announced they had plans to buy TPG, for around $200 million dollars or so, which would add significant customer numbers and infrastructure to the mix, resulting in them seeing stronger financial data, but how will they pay for it? I can see that they have something near $20 million in cash. They probably need an additional $180 million or more to complete the deal, which means they will have to get some form of finance to complete the acquisition. I am aware some of the payment is with shares, so it could be less than $180 million, but they still need to get the financing for it either way.

What is left to consolidate in the industry? All the ISPs would be doing if they did continue to buy is to simply make bigger companies destroy some competition, and find that they can reduce some costs somewhere due to network merging (ie. Soul and TPG merge networks, all of a sudden, they don’t need ALL that capacity).

The mess is, as iiNet will tell anyone, in the integration of the existing system, so that customers become “Soul” customers for example, which means moving billing, customer data, support, addressing, all that information under one roof so that the customers, and the staff supporting those customers are on the same platform.

iiNet when it integrated OzEmail had a few hiccups with integration from what I recall, they fixed them, and they weren’t significant blunders, but they did cause some customers to get confused.

Another Blog I have been reading a little of lately, is John Linton (Exetel Management), and a recent post by him was talking of a ‘per customer’ price.

The prices spoke of in that blog were in the area of $200 – $800 a customer! A customer can, in real terms be considered a ‘6 month customer’ – some might stay 12, but the average user on Whirlpool Surveys commits to only a 6 – 12 month contract. That customer, they would likely be making around $10 off, assuming the company didn’t make any expensive errors with a customer service, like Netspace did with me, when they provisioned a 512k service instead of the paid for and requested 1500k service, which according to my knowledge would have cost them the 6 month break fee for cancelling the service, and then submitting a new order – they were true idiots, but enough of that.

With the commit times being in the 6 – 12 month arena, the most profit one could hope to make off a customer without any upselling of VoIP or the like is $120 – $150 or so dollars. Paying $300 a customer? Who on earth would do that. On each customer, you are losing somewhere between $50 – $500 dollars. I must be missing some hidden value here with a customer, customers add to profit lines and also increase costs, so the ‘advantage’ can’t be in adding customers, it might be an increase in word of mouth marketing, but, if you botch a few services, well – some customers can be like me. Never let you live it down. Others will simply just not recommend you to anyone.

So, with that factored in, the purchase of an ISP at $300 a customer would still be extremely expensive, unless there was something else to gain. What that is, aside from a larger network and some cost savings is rather unknown. $200 million over 200,000 customers – $1000 a customer? A little crazy. But then, the DSLAMs and so forth would bring that down to $600 or so, still an insane amount per customer unless those customers carry some kind of ‘we will always bow down to our loyal leader – TPG’ mentality. Or, if all of them employed mafia techniques and made sure any new customer would be a new customer of the ISP, then, well $1000 is a bargain. But I have my doubts.

It’ll be interesting to watch what Soul and TPG getting together will do for the shares. I know there will be some devaluation due to the merger,  but also an increase because of the asset, profit, finances and customer gains.


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