2degrees buys Snap - adds internet

2Degrees is our third biggest telco - and may soon be on the NZ and Australian Stock Exchanges.

2degrees, the challenger mobile phone company, has announced it is buying Christchurch-based internet service provider Snap internet for an undisclosed sum as part of a move into the landline market.

At a press conference in Auckland today, chief executive Stewart Sherriff said he was "darned excited" to announce the move which follows a two-year partnership with Snap, the county's fourth-largest internet services provider.

2dgrees has a 23 per cent share of the mobile market by customers and 17 per cent by revenue and Sherriff said his inability to offer landline services had held back the company's mobile growth. He had three options - buy, build or partner - and decided buying was the best option.

"We'll be developing new product under the 2degrees brand that will be innovative and disruptive, we'll be a challenger brand that takes it to the big guys," he said.

Snap's owner Mark Petrie is taking an undisclosed shareholding in 2degrees as part of the deal and will continue to lead the fixed services division within the merged company. Neither he nor Sherriff would comment on media speculation the deal was for $26 million, including cash of $10 million.

Petrie, who bought out the Christchurch-based ISP's other shareholders three years ago, said the Snap network had been built for scale and was ready to scale up further.

"The fundamental question for us was how to take it to the next level. The answer was pretty obvious, we will merge with 2derees to primarily deliver us customers for mobile solutions. It's the best thing to do for my company."

Snap was set up 15 years ago and provides internet and IT services to a range of businesses nationally and has a large customer base in the South Island and a 20 per cent share of the residential fibre market.

Launched in August 2009, 2degrees now has over 50 retail outlets, 780 staff and 97 per cent network coverage across the country. All 120 Snap staff will remain with the merged company.

Sherriff said it will be another three-to-four months before the company launches fully bundled offers.

"The catalyst is UFB hitting the market right now. It's a huge growth opportunity and we want to take advantage of that," he said.

2degrees has not yet turned a profit, although it pared back losses in calendar 2014 to $35.9 million, down 20 per cent on the previous year's loss of $45.2 million. It reporting positive operating earnings for the second year since it was set up. Snap is profitable and has funded development out of cash flow.

First NZ Capital analyst Arie Dekker said last month 2degrees might have to scale back its ambitions in the mobile market and pool its mobile network with its two bigger competitors unless it can raise more money.

Dekker said if 2degrees was to build a sustainable business as a third network operator, shareholders would have to put more cash in but the company responded that it was fully funded.

The company has already committed over $550 million in building the country's third mobile phone network.

Last month, the Hautaki Trust cut its stake in 2degrees from 10.3 per cent to 7.4 per cent, selling out to the company's majority American owner, Trilogy International.

The trust had earlier borrowed $2.6 million from Trilogy in 2011 to maintain its stake in the mobile phone operator at just over 10 per cent, through a five-year loan secured on its shareholding.

The other two investors in 2degrees are European investment company Communication Venture Partners and KLR Hong Kong Ltd.

2degrees:

• 900-strong combined staff
• 50 retail stores
• National mobile network
• ADSL, VDSL and UFB services
• Now competing in all sectors of the telecommunications market