AltX-listed DataPro Group has announced it has acquired @lantic Internet Services - the largest independent consumer ISP (Internet service provider) - for R45 million. In terms of the acquisition, DataPro will acquire @lantic`s 32 000-strong customer base, while retaining the @lantic brand. The business will continue to trade independently.
This was confirmed by James Herbst, financial director of DataPro, who said the acquisition provides immediate bandwidth synergies, as well as revenue sharing opportunities in the future.
"@lantic is a well run business and has a superb distribution channel of over 135 franchisees around the country, as well as 500 dealers. The purchase gives us access to this channel and allows us to push our products and solutions offerings down this channel."
Herbst said with @lantic generating monthly annuity revenue of around R3.2 million per month and after tax earnings of R2.56 million for the year ended February 2005, industry analysts might regard the purchase on the expensive side "as it comes with a PE of 18".
"However," he said, "what is important to note is that the ISP landscape is now in `land grab` mode - where gaining precious market share and customers is paramount. Moreover, we anticipate earnings being enhanced by around R5.4 million for the year 1 September 2005 to 31 August 2006.
When asked how the purchase price of @lantic compares to similar price tags, Herbst was quoted saying: "If you draw a parallel between MWeb`s purchase of Tiscali in 2004, then the amount we paid for @lantic does not seem excessive. Tiscali - predominantly a dial-up focused ISP - was acquired by MWeb for R322 million. When considering that Tiscali`s profits for the year to December 2004 were R2 million, then using a PE valuation model, you get a ratio of 160 - this makes our ratio of 18 rather compelling."
Continuing, Herbst said there are also additional "downstream revenue opportunities". "In a study conducted by internet.org.za, the cost of spending 20 hours online per month during each year over the period 1993 to 2003 was analysed comparing the relative contributions of ISPs and Telkom to the total Internet access costs. What is clearly evident from this research is that the ISP share of online access revenue has consistently dropped from 41% in 1993 to 15% in 2003 whereas Telkom`s share of this revenue has increased from 59% to 85% over the same time period. If you factor in that an average dial-up customer will spend R100 per month on ISP connection fees, extrapolation indicates that Telkom`s revenue share per dial up customer may be in the region of R667. You can then estimate that with @lantic`s current customer base generating a revenue stream of around R3.2 million per month, that Telkom could be generating additional monthly revenue as high as R21 million."
Herbst notes that "with the second network operator coming on stream soon - and with the assumption that it will want to be competitive and gain market share as fast as possible - we believe we will be able to negotiate a modicum of revenue sharing with regards to this annual income. Conservatively, if we can negotiate a 10% slice of this R21 million monthly revenue, we can immediately add R2.1 million to our bottom line every month. When you look at these hidden benefits of gaining access to more than 32 000 customers, then you realise the allure of the transaction."
Herbst further pointed out that a relative "price to book" or "price to revenue" valuation technique may be a more appropriate. With the Tiscali debtors book of R16 million per month and annual revenue of R192 million you get a "price to book of 20.2" and a "price to revenue" of 1.68". "If you look at the @lantic transaction from this angle, the "price to book of 14" or the "price to revenue of 1.14" tends to indicate a fair price, all other things being equal. In addition, there is great demand for ISPs while the supply is shrinking - you only have to ask the mobile service providers, least-cost routing players as well as other would be VOIP (voice over IP) contenders.
The @lantic acquisition is DataPro`s second since listing last October. During March the company acquired Durban-based ISP, Wickhit, for just over R1 million. Investors may be familiar with @lantic through its sponsorship of the Pumas rugby side.
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