More from Bundeep of Bloomberg. This time no mention of X-Stream. Jeff
Freeserve Share Sale to Test Investors' Appetite for U.K. Internet Stocks
By Bundeep S. Rangar
Freeserve to Test Appetite for U.K. Internet Stocks: IPO Focus
London, July 23 (Bloomberg) -- Its product is free and the
company is unprofitable but its stock offering is set to be a hit
with investors. Welcome to the Internet and Freeserve Plc.
Dixons Group Plc, the No. 1 U.K. electronics retailer, is
selling about a fifth of Britain's largest Internet service
provider on the London and Nasdaq stock markets Monday for as
much as 150 pence a share. The sale will raise up to 1.51 billion
pounds ($2.4 billion).
To justify that price tag, analysts would normally be poring
over earnings ratios or future dividend yields. No such luxury
with Freeserve though. For the seven months through April, it
lost 1.04 million pounds on revenue of 2.73 million -- and it
won't say when it expects to break even on the revenue it gets
from advertising and phone calls on its free service.
''The purchasing decisions are based on sentiment, not the
viability of its business model,'' said Miles Saltiel, a
technology analyst at WestLB Panmure Gordon. ''The market is
interested in the Internet and there is bound to be a scramble.''
Demand has already outstripped supply, according to bankers,
and about 100,000 Freeserve users have registered for
preferential allocation of shares. Even so, analysts doubt the
euphoria will last.
''A few months later, it may well be a different story,''
said Saltiel.
Trumping AOL
Freeserve offers a directory of online services, e-mail, Web
space, entertainment and news to complement Internet access --
all for free. Since its founding last year, Freeserve has
leapfrogged America Online Inc. to grab a third of Britain's
Internet access market, set to be worth $1.9 billion by 2003.
Facing increasing competition from the likes of AOL,
Microsoft Corp. and a host of banks, retailers and media
companies that have begun offering free Internet access,
Freeserve wants cash to bolster its Internet commerce business.
'I've subscribed for it personally,'' said Simon Smith, who
helps manage about 10 billion pounds of U.K. stocks at Capel Cure
Sharp in Birmingham. ''Once the millennium is over, e-commerce
will probably be the No. 1 priority of any company with common
sense.''
The U.K. market for trading goods and services online will
expand to $13 billion by 2001 from $260 million last year,
according to Forrester Research Inc.
The company plans to benefit from an expected explosion in
the number of Web users -- the Computer Industry Almanac
forecasts U.K. Internet users are set to more than double to 17
million next year from 1998. Its Web site is already the nation's
third-most visited behind those of Yahoo! Inc. and the British
Broadcasting Corp.
''We want to be the U.K.'s home on the Internet,'' said John
Pluthero, Freeserve's 35-year-old chief executive and one of the
architects behind the free Internet service.
British Twist
In the four weeks to May 29, the company's Web site was
accessed 36 million times. In terms of time spent on the site, a
yardstick for valuing an Internet stock, users spent an average
16 minutes per day. That sort of attention was enough to provide
40 percent of Freeserve's seven-month revenue in the form of
advertisements and transactions.
Still, the numbers pale when compared with AOL's users in
the U.S. who spend almost an hour each day on the AOL Web site.
But this is where the twist really kicks in.
Whereas AOL and other North American Internet service
providers pay telephone networks to carry their traffic,
Freeserve actually receives a portion of every penny users spend
dialing into its service.
U.K. Internet users spend between 1 and 4 pence per minute
on local phone calls. As much as two thirds of that goes to
telecommunications company Energis Plc, which carries Freeserve's
traffic.
Analysts estimate Freeserve gets a tenth of Energis's share
-- enough to generate 1.61 million pounds in revenue, or 60
percent of Freeserve's seven-month total.
Energis, Britain's largest Internet traffic carrier, has
also benefited, pulling in about 14 million pounds in the same
period. Energis will buy 1.75 percent of Freeserve at 0.01 pence
a share and can buy a further 2 percent in the next four years at
the IPO price.
Some Snags
To be sure, Freeserve's expansion has come at a cost.
Contrary to its pledge when it was founded, the company now
doesn't expect a profit by the end of its first year this
September.
It's having problems maintaining clients -- some 830,000 of
the 2.15 million accounts opened with Freeserve are no longer
active. Deutsche Bank and WestLB Panmure Gordon, for example,
estimate the company's true value at about 600 million pounds.
Also, a recent report by Morgan Stanley Dean Witter pointed
out that Freeserve will generate only about 27 pounds in revenue
per user in five years' time. Even so, investors are still
prepared to stump up the equivalent of at least 1,000 pounds per
subscriber next week.
On the heels of Freeserve, two more U.K. Internet companies
are planning to sell shares. The Exchange Holding Plc, on online
insurance information company, and QXL Ltd., an Internet auction
company, will join Freeserve for a collective market value of as
much as 2.68 billion pounds.
Freeserve's share sale is being managed worldwide by Credit
Suisse First Boston and Cazenove & Co.
''Freeserve revolutionized the Internet market in the
U.K.,'' said Neil Bradford, director at Fletcher Research Ltd., a
London-based market research company. ''But it's not the last
revolution the U.K. Internet market is going to see.''
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