Consumer groups and politicians are expressing concerns with TPG's $1.4 billion takeover of iiNet, which would create Australia's second-largest broadband provider.

In an announcement to the stock exchange, TPG said it would pay $8.60 a share and iiNet shareholders would also be entitled to the company's latest 10.5 cent dividend.

Under the deal, iiNet may also pay a special dividend, subject to a favourable ruling by the Tax Office, however the cash purchase payment of $8.60 a share would be reduced by the amount of any such dividend.

The takeover target's board has unanimously recommended the deal, which is a significant premium on the $6.81 closing price yesterday.

The share price of iiNet has run up 6.4 per cent over the past three days after a 3.2 per cent slide on Monday, and was up from a recent low of $6.17 on February 24.

However, iiNet's shares had slumped considerably, from a high of $8.40 in August, to reach that low.

TPG already owned 6.25 per cent of iiNet, and there had been periodic speculation in the press that TPG might make a bid for iiNet.

TPG currently had a market capitalisation of $6.14 billion ahead of the offer, while iiNet was valued at $1.11 billion, and TPG will fund the takeover through extra debt.

The smaller company, iiNet, actually has more broadband customers with 950,000 as at July 2014, while TPG had 748,000 at the same date, although it also had 362,000 mobile customers.

The takeover was being seen by some in the industry as a happy marriage, with iiNet well known for its customer service and TPG using a low-cost business model, meaning cheaper prices for consumers.

"I think it's a good deal for everyone," Nick Harris, a telecommunications analyst with Morgans, told The World Today.

iiNet had humble beginnings, run out of a garage in Perth by two new players to the telecom sector.

After the dot-com bubble burst in mid-2000, iiNet fared poorly on the markets, with shares at one stage falling to 20 cents from a high of $1.

It has gone on to become a significant player in the Australian telecommunications sector, commanding a 15 per cent stake in the market.

Competition and consumer concerns

The deal would merge two of Australia's largest internet service providers, with over 1.7 million broadband subscribers combined, and would need approval from the Australian Competition and Consumer Commission (ACCC) to go ahead.

"The ACCC will commence a public review after receiving a submission from the parties," the regulator said in a statement.

"The CCA [Competition and Consumer Act] prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market."

Western Australian Greens Senator Scott Ludlam said he would be reminding the ACCC of that law, and its obligation to enforce it.

"Competition in Australia's broadband sector has been painstakingly built up over a period of more than two decades," he said in a statement.

"The ACCC must not sit by and let the sector descend into a feeding frenzy that leaves consumers with no real choice between services."

It is a concern echoed by telecommunications industry analyst Paul Budde, who foresees Optus being forced to either make a counter-bid, or look at other takeover options in response to TPG's move.

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"We haven't seen the end of it, so absolutely the worry is then are we going back to monopolistic sort of situations in the market, at least duopolistic and high market dominance, and that clearly indicates the importance of the regulator in processes like this," he told The World Today.

Morgans analyst Nick Harris disagrees, and said customers in both companies may actually be better off.

"At the end of the day you've still got competition," he said.

"You've got other options still out there at the price competitive end of the market like Dodo. So no, I don't think it's going to dramatically change anything."

Consumer group Choice was not yet expressing much concern about the competition implications, but it said the takeover of iiNet may have other negative consequences for consumers.

"iiNet has really been a distinct brand for consumers in the way that it's stood up for consumer rights and debates around privacy, around metadata, around online copyright infringement," said the group's campaigns manager Erin Turner.

"We'd hope they're retain that. It makes them completely unique in the market at the moment."

However, investors clearly do not foresee a problem with the companies getting regulatory approval for the takeover, with iiNet shares up 27.5 per cent higher at $8.68 by 11:15am (AEDT), almost matching the combined value of the cash offer and dividend payment.

TPG shares were up almost 17 per cent at $9.05.