MARKET COMMENT
Freeserve Interims

By Stuart Watson (TMFTiger)
December 18, 2000

Freeserve (LSE: FRE) delivered its latest set of interim results this morning showing that losses for the 28 weeks to 11 November hit £28.3m on sales of £30.2m. Freeserve is currently the subject of a takeover offer from Wanadoo, the French Internet Service Provider in which France Telecom has a 90% stake. Wanadoo is offering 0.225 of its shares for each share in Freeserve.

Other key performance figures included an increase in active subscriber numbers to 2.1m and a 0.5% reduction in the four-weekly churn rate to 6.4%. Average time spent by each user increased to 22 minutes per day. 60% of revenues came from connectivity with the remaining 40% coming from e-commerce and advertising. This compares with a 50:50 split for the same period last year. The company ended the period with £51.2m in cash.

Comment

These results reinforce why Freeserve needed to agree a deal. It is spending about £10m in cash each quarter and although unmetered access has driven revenues higher it drives costs higher still. Although the churn rate is coming down, over 6% every four weeks is still very high compared to similar consumer businesses. Freeserve spends most of its time running just to stand still. Freeserve had gross sign-ups of 482,000 in the last quarter but active accounts only rose by 87,000. The closure over the weekend of the UK's fourth-largest ISP, Breathe.com, is another illustration of how tough a market this is.

Freeserve's share price at the time of writing was 112.75p. That represents a  hefty 15% discount to the current value of the deal based upon Wanadoo's current share price of 9.7 euros. The combination of the two companies doesn't look significantly more secure and yet they will be valued at a toe-curling £8.5b. It's no wonder shareholders are heading for the door while they still can.

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