Orcon sale imminent

UPDATE: 5pm / More evidence has emerged that little-known Vivid Networks is in the running to buy Orcon - which Kordia this morning (finally) admitted had been put on the block.

Vivid Networks, a tiny ISP, is majority-owned by Vivid Solutions, a respected, longtime player in managed videoconferencing that specialises in the healthcare market and holds multiple DHB contracts.

A new company has been registered with the Companies Office called Orcon Holdings, whose sole investor Semple Investments, owned by Auckland men Tony Reimann and Warren Hurst.

Mr Reimann was until recently general manager for commercial operations at Revera, which hosts Vivid Networks' modest ISP business. Mr Hurst is a director of Vivid Network.

Neither immediately responded to an NBR request for comment. On the face of things, the pair don't have the financial resources for an Orcon deal; a partner could be lurking in the background; rumours say an Aussie venture capital outfit.

A senior telcommunications industry source told NBR that at one time Kordia hoped to sell Orcon for 1X revenue, which he estimated as $80 to $90 million (the company does not break out results by division), based on the fact Vodafone bought ihug for 1x revenue. But telcommunications companies were valued more on free cash flow and dividend yield post tech-boom, and the state-owned company was thought to have lowed its price to $40 million, or perhaps further.

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10.30am: After being confronted by NBR Online with a detailed tip-off, state-owned Kordia has finally come clean and confirmed its retail ISP business, Orcon, is on the block.

"Kordia has been in discussions regarding the sale of Orcon with several parties over a number of months. Interest in the business intensified following the announcement of the integration with Kordia in November last year," a spokesman says.

"Discussions are continuing, and Kordia expects to be able to make a formal announcement in the coming weeks."

Integration with parent Kordia has seen Orcon reach beyond its residential base for more focus on business services.

Kordia won't comment further, citing commercial confidentiality.

However, a well-placed telecommunications source tells NBR Online the deal has already been done.

Kordia recently reported a $2.2 million half-year net profit (down on the year-ago period's $7.3 million) on revenue increased 10.5% to $207.6 million. Results were not broken down by division. Net debt has increased $9.4m from December 2011 to $75.3 million. 

Rumours of an Orcon sell-off have been circling the industry for months. They were first raised by NBR last August.

The rumour mill has had everyone from 2degrees (which conspicuously lacks a landline business) to CallPlus circling. CallPlus chairman Malcolm Dick earlier offered NBR the general comment that he was interested in any ISP business, as long as the price is right. 2degree has emphasised it has partnership plans in the landline space. (UPDATE: Mr Dick told NBR late this afternoon, "We have not been involved in their sales process.")

But a usually reliable source has told NBR the buyer is in fact the almost-unknown ISP Vivid Networks, which is registered with the Ministry of Business, Innovation and Employment as a telecommunications provider. Records show it is an absolute minnow, with just 512 IP addresses, using bandwidth provided by TelstraClear and FX Networks, and co-located with Revera.

Vivid is part-owned by Vivid Solutions. Vivid Solutions CEO Simon Hayden dismissed the suggestion his company had anything to do with buying Orcon, pointing out its key focus these days is healthcare videoconferencing. Vivid Networks' directors could not immediately be reached for comment. 

Another source says "As crazy as it sounds I heard from a pretty good source about six weeks ago that Telecom Retail had been looking over things."

But however much Telecom might want to pick up Orcon's 100,000 or so customers, it would probably meet opposition from the Commerce Commission - as would Vodafone, if interested.

Second-tier ISP Compass Communications (which has a tidy side business in phone cards) has also been touted as a possible buyer.

And Orcon's longtime technology partner iiNet (Australia's largest independent ISP) would have to be seen as another contender. After all, iiNet already has a call centre operation in Auckland, leveraging its high dollar and cheaper Kiwi labour. However, an industry insider who had recently talked to CEO Michael Malone told NBR the iiNet boss was very much against the idea of owning an ISP on both sides of the Tasman because of the complications of dealing with two sets of regulators.

ISP market share
Telecom: 49%
Vodafone-TelstraClear: 29% (TelstraClear today: 16%; Vodafone: 13%)
CallPlus* 9%
Orcon: 5%
Others: 8%

Source: Commerce Commission telecommunications market report released 2012

* Includes CallPlus' residential brand, Slingshot.

$24.3 million buy
Kordia bought Orcon for June 2007 for $24.3 million (or $28 million in today's dollars) from entrepreneur Seeby Woodhouse.

Mr Woodhouse left the business. His prodigy, Scott Bartlett, was promoted to head the business.

A recent Kordia restructure saw Mr Bartlett promoted to run all of Kordia's New Zealand operation.

Orcon was bought as part of Kordia's bid to diversify as its once-core analogue TV business faced extinction.

However, recently commentators have pointed out that Orcon sticks out like a sore thumb as the company's only major retail business (its broadcast, telecommunications engineering and network services have a wholesale focus). Others questioned why a state-owned company was in the ISP business, full-stop.

Mr Bartlett has recently spoken to NBR about the complications of the retail ISP market as it stands today, with margin pressure, a lack of clarity over the future of Chorus copper line pricing and tension over who bears the cost of UFB connections, which could prove tricky even with subsidies.

More consolidation to come
"Tuanz expects there to be a lot more consolidation among ISPs as the reality of their current situation sinks in," Telecommunications Users Association head Paul Brislen told NBR as the news broke.

Margins for retail providers are already thin to non-existent and with the government’s intervention in the Commerce Commission’s determination process regarding wholesale prices, any possible upside for retailers appears to be evaporating, he says.

"Now that Vodafone has acquired TelstraClear we’re seeing the market shakedown to two or three major players and a raft of Tier Two ISPs that have little room to differentiate given our current wholesale market. Tuanz would expect there to be more consolidation at this level in the next few years.

Customers on the move beware
Mr Brislen adds, "We also expect to see a proliferation of smaller ISPs at the next level down once the UFB is completed. This kind of thing is not uncommon overseas where small ISPs pop up, acquire a few customers and either fold or are in turn acquired by larger ISPs keen to grow their customer base."

Mr Brislen adds, "It’s also important to remind customers they should only sign up with telcos or ISPs that are signed up members of the Telco Dispute Resolution Service (www.tdr.org.nz) – without that you have no backstop should something go wrong with the service you’re paying for."

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