m2 telecommunications

M2 chief rings in the changes


June 30, 2012



Geoff Horth … M2 founder Vaughan Bowen says Horth has an ''incredible commercial brain''. Photo: Jason South

NBN is changing the telco landscape and Geoff Horth is placing his company to take the best advantage.

Selling advertising for Woman's Day magazine is an unusual training ground for the telecommunications industry. But Geoff Horth has had an unusual career path. He started as an accountant, worked for Kerry Packer's magazines, and now he heads up one of Australia's fastest growing telcos.

While not yet a household name, M2 Telecommunications Group recently surprised the market when it announced it was buying Primus Telecom for $192 million - a company one third the size of its own market capitalisation.

Now M2 is ready to take full advantage of the shift to fibre-optic based telecommunications, Horth says, whether a national broadband network is built or not.



Horth grew up in a Sydney suburb on the northern edge of Royal National Park. He started his working life at ANZ Bank before winning a cadetship in Alcatel's accounting program that included studying accounting part-time at University of Technology, Sydney.

A ''very good leader'' at Alcatel (now Alcatel-Lucent) encouraged him to run the firm's small business service division then poached him when she moved across to Australian Consolidated Press, where Horth found himself in the Woman's Day advertising division.

Horth gradually drifted back to the telco sector and along the way met Vaughan Bowen, who founded M2 Communications in 1999.

Bowen says Horth ''struck a real chord with him'' and he started looking for an opportunity to hire him.

Horth joined the final Commander Communications management team, which sold off various parts and then handed the company over to administrators as it sank under debts of about $400 million.

M2 snapped up Commander's wholesale network services arm, Unitel, for $10 million in 2008. Horth joined M2 in April 2009 to help integrate another acquisition - People Telecom - but soon found himself merging parts of Commander into M2 after it bought the small- to medium-business unit for $19 million in June 2009.

Horth became chief operating officer within a year and Bowen says he had no hesitation handing the reins over to Horth when he decided to step down from the chief executive role late last year. ''[Horth] has got an incredible commercial brain and he just knows how to lead people,'' Bowen says.

Bowen still sits on the board as an executive director and actively keeps an eye out for acquisitions. Horth says this division of labour suits him because it ''stops me spending 90 per cent of my time in meetings with sell-side advisers''.

''To have someone who can be completely undistracted looking at M&A opportunities, networking in the industry, looking at every [information memorandum] that is ever issued in this segment - and there is a hell of a lot of them we look at [but] there is very few that we actually get in the process of,'' he says.

On April 16 this year, M2 announced it was buying Primus for $192 million, a move that puts it squarely in the retail market for the first time. ''The Primus business will provide a quantum leap in earnings for the group, while also resulting in M2 establishing itself as the fifth largest telecommunications company in Australia with the combining of the seventh and eighth largest businesses,'' Canaccord BGF analyst Warren Jeffries said at the time.

M2 expects the merger to boost profits 30 per cent to $38.3 million this financial year.

Mr Jeffries estimates dividends per share will climb from 16¢ last financial year to 23.4¢ in 2012-13. Shares are trading at $3.30 and Mr Jeffries has a target price of $5.10. In June M2 was added to the S&P/ASX 200 for the first time since listing in 2004.

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part from adding 165,000 retail customers, the Primus purchase is specifically designed to set M2 up for an NBN world and turns it into an ''infrastructure medium'' company rather than ''infrastructure light'', Horth says.

Historically M2 bought services from Telstra and Optus at wholesale prices and resold it at retail prices. With Primus it gained about 10,000 kilometres of fibre-optic cable networks and data centres in Melbourne and Sydney.

But with the NBN still politically sensitive - the opposition says it will halt the fibre-optic rollout in favour of a hybrid network - does that make the Primus purchase a gamble?

''Whether it is fibre-to-the-node or fibre-to-the-premise the reality is that as business-grade broadband services become more accessible to more people and more reliable and more affordable then fundamentally people will start to look at changing the way they consume voice [services],'' Horth says. ''It would be nice to have a clearer picture as to exactly what is going to happen in a Coalition government. But it actually would not change dramatically what we are doing today … You can't build a business model around what you believe might happen; you have got to build a business around the world that you know today.''

The purchase does not mean that M2 will stop buying wholesale services from Telstra and Optus, but it does mean it can offer its business clients services it could not offer before such as internet-based voice, hosted telephony and a managed data cloud services.

''Our supply partnerships - as everyone's will - will change to some extent over time. We have a large portion of our business that is still resale voice and will continue to be resale voice, largely with Telstra,'' Horth says. ''It does not mean Telstra will stop being a supplier of ours in an NBN world … it just means that we provide more of the application value that we did in a reseller model.''

As part of the purchase M2 gained Primus's network of 290 DSLAMs - cabinets at Telstra exchanges that allow Primus to sell broadband directly from that exchange. But this is copper-based technology and the copper network will be decommissioned as the NBN is rolled out.

It will still be many years before the NBN makes copper-based assets redundant, according to Horth.

''There is actually great returns to be made on the DSLAM assets we have today. If you look at the margins that iiNet and TPG are making on their DSLAMs, there is a very compelling business case to continue to sweat those assets until they are bypassed [by the NBN].''

Primus was sold to M2 by the Virginia-based Primus Telecommunications Group. An American, Tom Mazerski, took over the Australian operations and will stay on as M2's chief customer officer. Horth says he will apply special marketing techniques developed inside Primus to build its customer base on the NBN.

Mazerski cut $8 million in above-the-line advertising and sponsorship deals when he arrived in favour of targeting advertising to the households actually connected to telephone exchanges where Primus had spare DSLAM capacity.

''It is about getting the maximum return on the assets you have in that geography,'' Horth says, adding the new strategy was generating ''significant'' returns on investment and is the same approach Primus will use on the NBN, which has roll-out sites dotted across the country.

''NBN is very geographically centric … what we are doing today is great breeding for the NBN. Because we are not going to be standing up in the market spending tens of millions of dollars going toe-to-toe with iiNet and TPG and everyone. But if we develop a capability to acquire a share in a market by virtue of the fact that we are better at marketing in particular geographies then that is something that is pretty exciting.''

There are no more acquisitions on the immediate horizon for M2, although Bowen is constantly on the lookout. Horth says he is focused on integrating Primus and extracting all potential synergies. Already the M2 staff have moved to Primus's offices on Flinders Street in central Melbourne.

''I think it is unlikely that we would do another big deal in the next 12 months. However, we are also opportunistic and if there were deals that came along that we thought were going to add significant value to shareholders then we would absolutely contemplate them.''

source: SMH

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