Rocky start to Uniti’s road to success
It was a nasty break-up, not a love story, which greeted the co-founders of Uniti Wireless on Valentine’s Day two years ago.
It was a nasty break-up, not a love story, which greeted the co-founders of Uniti Wireless on Valentine’s Day two years ago.
The then internet service provider now called Uniti Group, which Che Metcalfe and Sasha Baranikov had founded seven years previously in Adelaide, sacked them on day two of its public life, blindsiding the pair.
The share price plummeted, a handful of investors started rumbling about possible legal action, and even the ASX itself was soon calling the company’s “candour” into question.
Fast forward two years and the founding pair, who no longer have anything to do with the company, are sitting on about $16m in stock each, Uniti Group has made 10 acquisitions, and investors in the IPO have watched their shares skyrocket.
It’s a journey, from 25c to in the region of $2 a share and a market cap of about $1.3bn, which managing director Michael Simmons says is built on a strategy of building a “core-plus infrastructure” business, with strong cashflows, driven by a strong company culture and an ability to rapidly integrate new businesses without killing off what makes them great.
From a public relations perspective, it’s a world away from the company’s start to listed life, but Simmons says the ambition is to continue to grow — albeit through probably fewer, but chunkier acquisitions — and to keep delivering for shareholders.
Road to expansion
Metcalfe and Baranikov, who were a couple up until a short time before the company’s public listing, founded Uniti in 2012, and had success delivering what, at the time, the NBN was often failing to do.
Customers hungry for faster internet speeds were flocking to the company, with Metcalfe, a serial entrepreneur, having finally landed on the idea that would seemingly take his aspirations to the next level.
The company started to attract investors including Vocus Communications founder James Spenceley and deputy chairman Tony Grist, who tipped in funds in 2016, and in 2018 Uniti received a $5m grant under a South Australian State Government Future Jobs Fund scheme that it said would allow it to accelerate expansions into Perth, Sydney and Brisbane, and eventually create 200 jobs.
Not all was well before the February 13, 2019 float, however.
The previous year, former Vocus Group chief financial officer Rick Correll left the company, for personal reasons, after only six months in the job, and late in 2018, Metcalfe and Baranikov, who were billed in the prospectus as key employees, had a falling-out.
Metcalfe told The Australian shortly after his sacking that he did not believe this was a factor in his “termination”.
However, an unfair dismissal claim later filed by Baranikov explicitly referred to her “marital status” as playing a part in the loss of her employment.
Uniti had raised $13.2m through the issue of nearly 53 million shares at 25c each, and the offer documents portrayed the founders as key staff members, setting out the performance shares they could earn, as well as their ongoing salary details.
Metcalfe was named as chief technology officer and Baranikov as chief operating officer, both on $200,000 a year. In the end, both received just one month’s salary in lieu of notice.
The documents lodged in the court case, which has since been confidentially settled, argued that Baranikov had been subject to “clumsy bullying” by a shareholder that led her to agree to a lesser salary and cut her termination payout to just one month.
Under the threat of being removed from the board and executive of the company she co-founded, she “very reluctantly” signed the new contract to “prevent the IPO [initial public offering] process being derailed”, the documents alleged.
“The applicant was very distressed that she was being subjected to bullying behaviour,” the documents said.
“The applicant’s marital status was a substantial and operative reason for the termination of her employment with the first respondent.’’
In its defence documents, Uniti denied the sacking had anything to do with Baranikov’s relationship breakdown, and said it was due to her “poor performance and unsuitability for the job’’.
“[Uniti] admits that the applicant was advised that her employment was terminated for reasons including a lack of skills and experience,’’ the defence documents stated.
The company had told the ASX that “the employment of both persons was terminated by the CEO on the afternoon of the 14th February 2019. The termination is part of the rationalisation and integration of the FuzeNet business acquired on the 11th Feb … and the Uniti business.
“This is a change identified by the CEO and is a decision made as part of the rationalisation of two businesses.
“The board will consider its composition and vacancies in the near future.”
The ructions drew the attentions of the ASX, with questions being submitted to the company for a response.
In relation to the company’s assertion that Simmons came up with a rationalisation program that necessitated their sacking over the course of two days, the ASX said it “questions the candour of this response”.
“If the CEO had developed a rationalisation program as at 12 February 2019 and the termination of Mr Metcalfe and Ms Baranikov was part of that program, it seems reasonable to assume that the CEO was contemplating the potential termination of employment of Mr Metcalfe and Ms Baranikov prior to 12 February 2019,’’ the ASX said in a question to Uniti.
“Please advise when the CEO first considered the potential termination of employment of Mr Metcalfe and Ms Baranikov.’’
‘We’re building networks, high-margin, high-quality, technology-proof, to meet the data and speed demands’
Uniti stuck to its story, saying the reason the decision-making process was so rapid was because Simmons only gained full access to FuzeNet, the company acquired with funds raised through the initial public offer of shares, on February 11.
Metcalfe and Baranikov did not respond to attempts to contact them. Their shares, which company documents indicate they still hold, were scheduled to be released from escrow two years since the date of the company’s listing, and a recent ASX release indicates this has probably just happened.
Nowadays Simmons would much rather talk about the business, but he says having a husband-and-wife team running the business was never going to fly.
“I’m guessing they’re two very happy people,’’ Simmons said, referring to the stock price appreciation.
“To summarise all of that — husband and wife, co-CEOs, the company had had a lot of money put into it, and the money was nearly gone. And it still wasn’t cashflow positive or profitable.
And there was an agreement to bring in a new CEO to try and fix it.’’
Simmons said making changes in such an environment was “always going to be difficult’’, hence the decision that was taken.
“It just can’t work. Hopefully they’re very happy with the outcome today.’’
The story he wants to tell is about a phenomenal two years running the business, and what they’ve got in store for the future.
And with a recent $10m capital raising, subsequently doubled to $20m, closing seven times oversubscribed, it’s clear investors are listening.
Pedigree for the job
Simmons has a great pedigree for the job — 26 years at TPG Telecom, serving as chief executive for a large period of that time. He was a director of M2 Telecommunications from 2008 to 2016, when it merged with Vocus, where he joined the board and later became chief executive.
By March 2018 he had brought M2 group founder Vaughan Bowen into the fold at Uniti, and Bowen demonstrated his faith in their abilities by sinking $951,000 into Uniti shares. That stake is now worth $6.15m.
Simmons says Uniti, which was solely an ISP business at the time, was losing money, and a strategy was needed to get it firing. That strategy has involved an aggressive acquisition strategy, which started off relatively modest in terms of the dollar amounts involved. That’s definitely changed.
Uniti finished last year by swallowing Opticomm for about $700m and Telstra Velocity for $140m.
“But there’s still a long way to go,’’ Simmons says. “We regard ourselves as a start-up.
“When we listed it was fundamentally a new CEO, new chairman, the other two directors on the board had only joined recently and Vaughan Bowen hadn’t joined so we saw ourselves as a start-up [then].
“We got to $2 [a share] in less than two years, which is eight times what we listed at.
“The fundamental goal of the company hasn’t changed pre and post-listing. We are still building networks as an alternative to the NBN.
“That was the original intent of Uniti Wireless. The difference is the network technology, the infrastructure, the way we’ve gone about it.
“We are, what I’ve learned in recent months, when we had the battle for Opticomm, we’ve become what they’re now calling ‘core-plus infrastructure’.
“We’re an infrastructure company. We build, principally, fibre-to-the-premise networks, and historically to consumer residences in greenfields.’’
Simmons said this would become more diverse going forward but the infrastructure-like nature of the business would persist, and investors were interested.
Simmons says the recent Bingo Industries play by an Australian private equity group was an example of another “core-plus” investment play.
“This is an infrastructure play in their minds, but it’s a waste management business,” he says.
“A few years ago, infrastructure was toll roads, airports, energy infrastructure, those types of things, but COVID has shown people there are other businesses or industries that are infrastructure-like in the economics of the business. That’s what we are.’’
The companies acquired by Uniti include:
● FuzeNet, March 2019, $8.1m
● Pivit, April 2019, $450,000
● Fone Dynamics, May 2019, $5m
● Call Dynamics, May 2019, $2m
● LBNCo, August 2019, $100m
● OPENetworks, October 2019, $27.5m
● 1300 Australia, December 2019, $78m
● Harbour ISP, November 2020, $9.25m
● OptiComm, November 2020, $700m
● Telstra Velocity, December 2020, $140m
It’s been a furious acquisition pace, with Simmons saying the executive team drives the strategy and picks targets, although not surprisingly they have plenty of approaches.
Successfully merging the businesses — at the back end while preserving what makes each successful — is the key. “We do have a really firm strategy which we called out early on and have never wavered from,” Simmons says.
“We’ve invested in three segments which had infrastructure-like earnings, margins and cash generation.
“We’ve fully integrated every company we’ve acquired, the operating systems in the businesses are common.’’
But the company hasn’t integrated “across” businesses.
“Synergies are quick, cash generation is quick, we became very efficient very early,” Simmons says. “It’s worked beautifully.’’
Simmons says many companies in the telco sector failed to deliver cash generation along with EBITDA, which was where Uniti shone.
“We’re building networks, high-margin, high-quality, technology-proof, to meet the data and speed demands for the foreseeable future,’’ he says.
As an example of the company’s success in integrating its acquisitions, Simmons said the businesses it picked up in its speciality services division, such as 1300 Australia — the nation’s largest supplier of “phone words” telephone numbers — had been delivering earnings of $12m-$13m a year at the end of 2019, which had increased to a run rate of $21m.
“It’s selective, you can’t do that for every company in the sector, for every vertical,” he says.
“Grabbing a bunch of NBN resellers, pulling them together and expecting to triple the earnings in 12 months, it just wouldn’t happen.’’
Simmons says taking the same approach with Uniti over the next two years would not necessarily work, so the company was spending a lot of time at the moment on its strategic plan for the next 12-24 months in terms of inorganic growth.
“We’ll see a bit of variation in our gameplay. That’s just about being adaptive.’’
The company now has offices in all the mainland state capital cities, with a large presence in Adelaide where it started out, where it has located many of the roles associated with Harbour, and directors spread across Adelaide, Melbourne and Sydney.
“It’s become a national business with no real head office,’’ Simmons says.
The company has raised plenty of funds to fuel its takeover spree, but perhaps unsurprisingly there’s still an appetite to buy in to the new issues.
A share purchase plan offering $10m worth of shares in mid-December was oversubscribed by more than seven times, with Uniti bumping it up to $20m.
The company said the institutional offer, which funded the Velocity purchase, was also “significantly oversubscribed’’.
And M&A activity was set to continue, but as alluded to earlier, with a different rhythm.
“Our M&A won’t be the rush of deals that we’ve had in the past in terms of numbers. But when you get to north of a billion [market cap], the smaller deals become less attractive.
“But the addressable markets we’ve got are really exciting,’’ Simmons says, adding that the company would also look at adjacent markets.
“It’s going to be another great year I hope.’’
For the now-absent founders of Uniti, it has perhaps been a white-knuckle ride, watching on as the business they brought to life was swept away from them, and transformed. But at least they have millions of reasons to smile.
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