Vocus Acquisition of FX: Good for Customers?
Consolidation is happening in the New Zealand wholesale ISP market, with Vocus acquiring FX. Consolidation can lead to less competition, or it can strengthen it, by making players stronger and more viable. This acquisition should strengthen the market, and hopefully open up new service offerings.
In July Vocus Communications announced its intention to acquire FX Networks. From the press release:
FX owns a unique and high quality fibre optic network consisting of 4,132 kms of modern ducted fibre cable covering both the North and South Islands of New Zealand. The company has 365 customers including 43 of the Top 100 companies in New Zealand.
Vocus will acquire FX for an enterprise value of NZ$115.8m (~A$107.7m). The FX business is expected to deliver NZ$13.5-$14.5m of EBITDA in the first 12 months post acquisition (excluding transaction and integration expenses).
The combination of Vocus and FX strengthens both businesses. Vocus will emerge as the third largest network operator in NZ and the clear leader in trans-Tasman telecommunications and data centres.
Vocus has their own fibre network around Australia, and has a significant international network, with high-level peering. In 2012 they purchased Maxnet, a New Zealand ISP and Data Center provider. They deliver international transit services to many New Zealand ISPs (including FX).
FX has focused on building out local fibre connectivity, and while they do re-sell international transit to New Zealand ISPs, they do so at a lower level than providers like Global Gateway or Vodafone/TelstraClear. Instead they focus on providing domestic backhaul - particularly useful to ISPs looking for UFB backhaul services.
This makes FX a complementary acquisition for Vocus. They have experience running metro and regional fibre networks, they have good international connectivity options, and they have some experience operating in the New Zealand market. They should understand what it takes to finance and operate this type of network.
FX needs capital to continue rolling out their Infinera equipment. They have much of the fibre they need in place, but they need to continue upgrading the gear that connects to that fibre. That takes cash, and commitment from investors to wait several years for payback.
Vocus should be able to provide the financial backing that FX needs. They are a listed company, and can raise more capital if they need to. They are not loading up FX with debt as part of the acquisition, so this should be a long-term play, without immediate financial return pressure.
This move also ensures the viability of FX/Vocus against Spark (Telecom) and TelstraClear (Vodafone), the two major players in the NZ wholesale market. They will know they can’t divide the market between them in a cosy duopoly. Strong alternatives can offer new products, and create strong price pressure.
Not Without Risk
All acquisitions come with risk. Some risks I can see here are:
- FX could lose its culture. FX has been a nimble operator, and flexible and open when working with customers. They may lose this when they become part of a larger organisation. Customers will notice if they do. This is a real possibility.
- Pressure to deliver: FX has been in a ‘build and grow’ phase, but they may shift to more of a ‘operate and sweat the assets’ phase, as the new owners look for a return on investment. This dramatically changes the pressures placed on the business. I don’t think this will happen in the short term.
- People: Inevitably, some people will lose their job, and others will decided they don’t like the uncertainty or change. FX has significant physical assets, but a company is defined by its people. Lose the wrong people, and things fall apart quickly.
The Future: New Services
New Zealand ISPs pay separately for Domestic and International transit. International transit is around 4–5x the cost of Domestic. This was driven by the cost of transit to the US, where most content was previously located.
But now we’re seeing more content coming from Australia, as Google, AWS, Rackspace etc have opened data centres. L2 transit costs to Australia are around half the cost of transit to the US. But L3 transit has always been a single international rate. Maybe now Vocus/FX will be in a position to offer three tiers of pricing to ISPs - Domestic, International, and Trans-Tasman.
We should also see better pricing and options for Trans-Tasman businesses that need connectivity between sites all around Australia and New Zealand.
A Good Move
Overall I think this is a good acquisition for Vocus, and a good result for the FX shareholders. If they do it right, it should also be good for customers. Give us more services and better pricing, and we’ll be happy. Just don’t lose what made FX good in the first place.