2degrees buys Snap

UPDATE: 2degrees confirms it has bought Snap.

The price is undisclosed. Industry talk has put it between $26-30 million.

2degrees chief executive Stewart Sherriff said the two companies had partnered for a while and three or four months ago they opened takeover talks.

Snap chief executive and owner Mark Petrie (34) becomes a 2degrees shareholder under the deal. Neither party was willing to immediately disclose his stake or say if there was also a cash component.

Mr Petrie says his customers wanted a mobile offering.

A play for more business customers
Mr Sherriff says Snap's business customers were a key attraction. He agreed with IDC's critique that 2degrees has been losing business deals to Spark and Vodafone because of its lack of a fixed-line offering.

"Doors that have been closed to us are suddenly open," he says.

Snap, which has 120 staff, last year told NBR it had 30,000 customers, 50% of whom are business customers, plus large organisations like councils, universities and health boards. Mr Petrie would not comment on customer numbers today.

Mr Petrie will serve as a 2degrees manager in the new role of head of fixed line. He says he will stay on, long term.

As well as an increase to 2degrees’ total business, he says it will help the company gain more mobile accounts in the enterprise market. He puts 2degrees’ total mobile market share at 23% and its mobile revenue share at 17%.

The combined company will have 900 staff. Mr Sherriff said his company wanted Snap's fixed line infrastructure but also called it a talent buy, saying Snap's 120 staff had skill his own company lacked.

Gaining scale, but only a bit
As the deal was announced, IDC research director Peter Wise this morning underlined his comment that the deal would help 2degrees in the business market.

But he added that the ISP market is increasingly commoditised and increasingly about scale, and "it's a question of whether the combined company will have enough scale."

2degrees says Snap is the country's fourth largest ISP (Snap has not featured in Commerce Commission figures, beyond presumably being included in the 5% "other" category).

The third largest, CallPlus (including Orcon, Slingshot and Flip) is by most estimates at least twice the size with about 220,000 customers or 13% of the market. Vodafone holds around 31% and Spark about 49% according to the ComCom's most recent market report.

The Christchurch-based Mr Sherriff says his company has 20% of the residential fibre market. Mr Sherriff says increasing that will be a major point of focus for his expanded company's broadband product.

Content play coming
First NZ Capital analyst Arie Dekker, who follows Spark, agrees with IDC's take that 2degrees needed to fill the fixed-line gap to win business contracts.

He adds, "Of course the next thing it will need to find is a content play."

Content is all the rage right now from Spark's Lightbox to Netflix NZ (launching tomorrow).

Do 2degrees and its new acquisition have plans for a streaming video-on-demand service. "I'm looking at content right now," Mr Sherriff says. However, he won't go into specifics.

ckeall@nbr.co.nz

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EARLIER: 2degrees will make "a major development regarding the future of the business" at 10am this morning.

Two well-placed sources have told NBR the telco will buy Snap for $26-30 million.

Neither 2degrees nor (perhaps more tellingly) Snap boss and owner Mark Mr Sherriff will comment.

On Snap's website, its business section has turned from Snap orange to 2degrees blue, with the message "Stay tuned. New everything coming soon."

What is known is that last August 2degrees chief executive Stewart Mr Sherriff told NBR his company would make a landline play within 12 months. These days, fixed line means broadband. 

At the time IDC research director Peter Wise told NBR that 2degrees' lack of fixed line service was costing it business deals.

Ironically, last year Snap was itself on the acquisition trail as Orcon and its 60,000 customers went on the block. The ISP was ultimately bought by CallPlus for a rumoured $30 million.

Shortly after the deal was announced, Snap general manager James Koers told NBR it initially looked a great opportunity to "supercharge our growth" from 30,000 to 90,000 customers but the price wasn't right.

And notably – given 2degrees is looking to get into the fixed line business and grab more business contracts – Mr Koers also said, "One of our biggest concerns is that it would have potentially unbalanced our own business. The retail ISP game is pretty brutal and we've been very careful over the past few years to make we have balanced growth between consumer and business."

And Mr Sherriff chipped in that, "One thing about Snap is residential represents less than 50% of our revenues. For example, we have customers like councils, universities, wholesale, and transtasman customers which make up a large part of Snap business, so it makes us look smaller if ISPs are lined up by just their retail presence."

Snap's 30,000 customers would put it roughly level pegging with TrustPower as perhaps the fourth largest ISP in the country. But there is a lot of daylight between it and CallPlus Group (including Slingshot, Orcon and Flip) with 220,000 customers and 13% market share (according to ComCom figures), then the big boys Vodafone (31%) and Spark (49%). Business customers are, of course, worth more than home users.

Although small, the Christchurch-based, New Zealand-wide operating Snap is well regarded, and it would give 2degrees a good set of home and business fixed line services.

Mr Sherriff said 2degrees had three paths to the fixed line market: buy, partner or build.

The last two are also possible. 2degrees could partner with Snap and possibly others or it could create its own fixed line service piggy-backing on the UFB.

There has also been speculation about a new investor in 2degrees. That's possible but the company has previously been shy of publicising shuffles in its privately-held shares. 2degrees is majority owned by Seattle-based Trilogy (in turn controlled by Forbes rich list billionaire John Stanton), which holds a 62.85% stake; European company Tresbit (27.68%), iwi group Hautaki (7.38%) shares held by staff (1.59%) and estranged founder Tex Edwards (0.51%).

ckeall@nbr.co.nz

Follow @ChrisKeall