Telecommunications carrier M2 Group may acquire Australia's fourth-biggest electricity and gas retailer Lumo Energy to boost its customer base and product range in a deal that could be worth nearly $300 million.
M2, which owns well-known telecommunications companies Dodo, iPrimus and Commander, is thought to be preparing an indicative bid for Melbourne-based Lumo, which has been put on the block by its parent, New Zealand infrastructure owner Infratil.
Lumo, with more than 500,000 customers, could be worth about $280 million based on the $562 a customer that AGL Energy paid last year for junior retailer Australian Power & Gas.
While the NSW and Queensland state-owned electricity retailing businesses fetched more than $1000 a customer when they were privatised, they were valued more highly because they had an loyal base of consumers that had never switched supplier.
Retailers such as Lumo, in contrast, have built up their businesses by poaching customers through discounts and special offers, so their customers are typically less "sticky" and likely to switch again.
M2 has rapidly grown over the past five years to become one of Australia's biggest fixed-line telco providers with a market capitalisation of about $1.1 billion.
It has done so by being a prolific acquirer – purchasing its rivals and slashing costs to generate strong earnings.
But M2 has been forced to look at less conventional telco takeover targets since the market was largely reduced to five major players after iiNet bought South Australian outfit, Adam Internet, in 2013.
In February M2 chief executive Geoff Horth told The Australian Financial Review the company would cast a wider acquisition net and significantly boost the revenues generated by its energy products by 2015-16.
M2’s budget brand Dodo has an established energy business. But it generates lower profit levels from sales of gas and electricity services compared with what it makes from selling internet and phone line products.
“We’ve got a nice [energy] business generating good earnings but it’s fair to say it’s not a scale business right now,” Mr Horth said at the time. “We’ll make around $100 million the energy business this year so . . . we’re very small fish at the moment.”
TREND TOWARDS BUNDLED SERVICES
M2 would likely be forced to raise money through a combination of sources that could include the issue of new shares or increased bank borrowings.
A takeover of Lumo by M2 would reflect a growing trend towards offering bundled services to customers in both the telecommunications and energy sectors, which is forcing retailers to offer more comprehensive yet tailored services.
Australia is likely to follow the trend evident in North America towards convergence for all home services such as telecommunications, power and appliances, Accenture said recently.
Where Telstra has kept large numbers of customers loyal by offering Foxtel television bundles, M2 will be reliant on Fetch TV for its home entertainment package, which in turn is also sold by several of its competitors including iiNet and SingTel-Optus.
A strong energy offering would give M2 a vital point of differentiation from its competitors.
M2 is likely to face competition for Lumo, with analysts pointing to potential interest from mid-tier energy retailers such as ERM Power, Alinta Energy, as well as larger suppliers such as Origin Energy and EnergyAustralia.
But would-be rival bidder AGL Energy, which is locked in an Australian Competition Tribunal process over the $1.5 billion takeover of NSW power producer Macquarie Generation, has said it is not interested, as has New Zealand’s Meridian Energy, which has a small retailing business in Victoria.
Infratil said last week that indicative bids for its energy assets in Australia, which includes utilities connection provider Direct Connect Australia as well as Lumo, were due by mid-July. Lumo also owns 165 megawatts of gas-fired power generation capacity.