biz.yahoo.com
Friday May 12, 9:28 am Eastern Time
worldlyinvestor.com Region of the Day
Bidding for Freeserve
By Chris Wickham, Correspondent
The UK's first subscription-free ISP is up for sale. Takeover talk should keep pushing its stock up.
It seems that 20 months after launching Britain's first subscription-free Internet service, the electrical retailer Dixons (OTC: DXNGY - news) has realized that time's up for Freeserve (Nasdaq:FREE - news).
Dixons, which still owns 80% of the company following Freeserve's IPO in August last year, confirmed earlier this week that it's considering a sale but it refused to comment on reports it has hired Goldman Sachs to advise on its options.
Now the potential bidders have become the subject of much speculation, with Freeserve's shares benefiting from the takeover discussions.
Freeserve's Business Threatened
In its short life, Freeserve has become Britain's largest Internet provider with nearly 2 million users and a market capitalization of about 4 billion pounds. But the recent launch of several services in Britain offering unmetered Internet phone calls seriously threatens to undermine Freeserve's business. Freeserve relies heavily on taking a cut of the phone charges levied by telecom carriers for access to the service.
Freeserve shares are currently changing hands at just over 400 pence in London, twice their market debut level last August but less than half the 920 pence high seen earlier this year. The sharp decline reflects concerns that the new flat-rate access offers may pull the rug from under Freeserve's feet.
T-Online Seen As Bidding Other potential bidders include British Telecom (NYSE:BT - news) and the smaller UK telecoms group Energis (Nasdaq:ENGSY - news).
But many analysts, including Miles Saltiel, an Internet analyst at WestLB Panmure in London, believe a bid from T-Online, which is Germany's largest Internet provider, makes the most sense.
Saltiel explains that the German group's IPO last month has given it the stock currency to negotiate with, adding that the flotation plans of a number of other Internet providers that might have been interested in Freeserve have been put on hold because of recent adverse market conditions.
Ride the Freeserve Wave
In a note published this week, Saltiel points out that Freeserve is trading at a discount to both America Online (NYSE:AOL - news) and T-Online, and its shares are likely to rise further if the bid speculation persists.
He advises clients to ``ride the wave if you are feeling sportif (but) take profits if the paper gets over 550 pence.''
A sale is looking extremely likely, says Saltiel. ``So far from making it as a dominant player, Freeserve now finds that revenues, differentiation and market share are all under immediate threat.'' He adds: ``This brings to the fore the prospect of (Dixons) cashing out while the company's principal asset, its eyeballs, have value.''
IPO Restrictions Remain
There are some complications involved in a sale of Freeserve. Under the terms of the IPO flotation, Dixons is allowed to sell half its 80% stake in August, but must retain the remaining 40% for another year.
But analysts don't believe this condition will hinder a sale. William Laurent, an analyst at Donaldson Lufkin & Jenrette, says that if the takeover is via an agreed bid, which seems highly likely, then an agreement to buy Dixons' remaining stake at a future date could easily be written into the deal.
Laurent agrees that a T-Online/Freeserve combination is the most likely outcome. Freeserve is keen to become part of a bigger group to help defend its position in the UK and T-Online has made no secret of its ambitions to expand outside Germany, he says.
Since its flotation last month, shares in the German Internet provider have seemed remarkably immune from the volatility that now seems commonplace among Internet shares. It floated at 28.5 euros per share, which at the time was considered a cautious valuation, and the shares are now trading at close to 40 euros. By the end of March, T-Online had 5.3 million users, up from 4.2 million at the end of last year. |
