UPDATED: Five bidders for Orcon - sources

UPDATE: Two chief executives have updated NBR on their companies' plans, or not, for Orcon.

Warehouse Group CEO Mark Powell says his company has "no interest whatsoever" in making a bid for the ISP.

Vodafone NZ CEO Russell Stanners says his company took a look at Orcon during the current sale process, but decided not to proceed to the due diligence phase. He declined to say Vodafone took a pass, citing confidentiality clauses in the MoU.


EARLIER: Orcon is up for sale, and five bidders are in the running, two industry sources tell NBR.

Three names understood to have submitted indicative bids are 2degrees, CallPlus and The Warehouse.

NBR understands three or four parties are running due diligence.

CallPlus (which includes the Slingshot) holds around 8% of the retail ISP market. Buying Orcon, which holds around 5%, would give it a boost in scale against the big two (Telecom with around 50%, and Vodafone with around 29%).

And IDC senior research manager Peter Wise says while conditions are challenging for retail ISPs - and more so with uncertainty over Chorus' wholesale pricing - Orcon could be attractive to the right buyer.

2degrees has been looking to partner or invest in a fixed line player (as the company confirmed last week) .Orcon could fit the bill. Mr Wise says at the moment, 2degrees is missing out on some business deals because it has no fixed line service.

The Warehouse' apparent involvement is not so readily explanable. The group has been increasingly engaged with online, buying e-talier Torpedo7 for $33 million, and taking a 50% stake in Shane Bradley's ShopHQ, Overseas, some retail chains run MVNO (or mobile virtual network operator) services, rebadging a telco's service. It's possible The Warehouse would make such a play in the internet space with a Warehouse-branded ISP.

"Virgin Mobile in the UK was originally formed as a joint venture between Virgin Group and a mobile operator One2One [which later became T-Mobile].  It's an example of using a brand that is very strong in other areas - music and airlines -  being successfully transferred to telecommunications," Mr Wise says.

"The Warehouse is obviously a strong NZ brand," the IDC analyst says, "But the broadband market is not in a high growth phase and selling broadband as a service throughout retail stores has not been very successful in the past so it's difficult to see what the business case would be for a retailer."

Entrepreneur and Voyager CEO Seeby Woodhouse - who founded Orcon and sold it to state-owned Kordia for $24.3 million in 2007 - told NBR he was interested in bidding for the ISP when Kordia put it back on the block early last year. But by the time he learned of the sale process, a private investor consortium led by Warren Hurst was already in the final stages of closing its successful bid. Mr Woodhouse had no comment on the current process.

Options include full sale - CEO
Last week, Orcon CEO Greg McAlister confirmed investment bank Grant Samuel had been engaged. Ironically, it was Grant Samuel that ran the sale process for Kordia last year.

Mr McAlister pitched it as a postive. "We’ve experienced good growth and seeing that, we need a bit more capital to support that growth. The current shareholders are looking to attract more shareholders. That’s pretty much what’s going on," he told NBR last week.

This morning, NBR again asked Mr McAlister if the Grant Samuel process could include a full sale.

"It depends on what the value is with the various options that are bought to us," he replied.

He would not identify any of the participants in the Grant Samuel process.

Asked if there was a timeline for an investment or sale, Mr McAlister said, "Not that we're sharing publicly [but] It’s something we’re moving on pretty quickly."

Highly leveraged deal
While many details of Kordia's April, 2013 sale of Orcon have never been made public, NBR understands that it was a highly-leveraged $36 million deal. ASB Bank lent $20 million and state-owned Kordia chipped in $10 million of vendor financing. Last week, Orcon shareholder Warren Hurst denied debt pressure was behind the Grant Samuel process. This morning, Mr McAlister said "ASB has been very supportive."

 "We're growing great guns and we want more capital so we can keep our foot to the floor," Mr McAlister said.

While he would not comment on financials, the CEO said Orcon was profitable. "We’ve got good earnings, our P&L is in great shape,"

He said gross customer acquisition had increased "25% to 30%" month on month on the back of the ISP's high rotate ad campaign, fronted by Kim Dotcom. 

He would not give a net gain figure but said churn was down and that Orcon's total customer count was "above 60,000" (the number given at the time of the April 2013 Kordia sale).

 And while he again would not give any specific figures, Mr McAlister said average revenue per user (arpu) had been increasing "which is against the industry trend."

The gain was because 70% joining Orcon on fibre or copper are signing up for the company's $99 unlimited plan. A third of customers were now on the more expensive plan (previous Orcon campaigns have pushed its $75 entry level plans.

IDC's Peter Wise says his company's market research backs Mr McAlister's claims. The ISP “has been punching above its weight recently and getting over 10% of the share of growth in the market. Orcon certainly got some good growth in the quarter to December, off the back of its unlimited plan campaign [fronted by Kim Dotcom].”

And while Mr Wise acknowledged the success of Orcon's Dotcom ad campaign, and the ISP's associated gain in total customers, he noted "Where it could be struggling is with the mix - it is a very consumer-centric business - a lot of its competitors have a much higher proportion of business customers that attract higher margins."

Mr McAlister would not comment on the amount owed by Orcon (the company continues to play its cards close to its chest; it also refuses to disclose the identity of any any of its private investors beyond Mr Hurst and his business partner Tony Reimann, who between them own 48% through Semple Investments. The other 52% is owned by anonymous investors through a nominee. Orcon's director's are Mr Hurst, investor Maurice Kidd (a former executive at Eric Watson's Cullen Investments), House of Travel CEO Mark O’Donnell and Yellow Pages CEO Michael Boersen.

Kordia declined comment.



Orcon brand and communications manager Quentin Reade announced today, via LinkedIn, that he had decamped to fill the same role at CallPlus.

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