Fool's Eye View

[ November 22, 2000 ]

Wanadoo-a-deal with Freeserve?

By Rob Davies (TMFEssex)

Carburton Street, London -- Freeserve (LSE: FRE) started the tech boom in the UK last year when it was floated off by parent company Dixons (LSE: DXNS) at 150p. Now it looks very much as if it signals the end of the hubristic tech bubble by being bought by French Internet company Wanadoo at about the same price. The press release this morning said, "On the basis of yesterday's share prices it is unlikely that any such offer would be at a substantial premium to Freeserve's share price." The shares closed at 146p yesterday so investors who have held their 500 shares from the beginning will probably suffer a small loss.

However, it could actually be worse than that. We are dealing with the virtual economy here and real money has little to do with these companies so the currency of acquisition will almost certainly be in French IOUs; shares in Wanadoo. Assuming the takeover is priced at 150p the average retail investor from the IPO will find his £750 worth of stock will be swapped into about 105 shares of Wanadoo. Most investors will find it a nuisance to hold such a small holding of foreign shares and will sell. It obviously makes much more sense to do that before the deal is done and eliminate troublesome foreign exchange transactions.

Some brave souls may want to persist in holding another vapour stock. Wanadoo is valued at about £9b and has sales of around £500m. But the recent French court decision to fine Yahoo $13,000 a day unless it complies with its wishes is indicative that this is a country that hasn't quite grasped the Internet thingy yet.

Nevertheless, even if individual holders keep their shares it is extremely unlikely that Dixons, run by Europhobe Stanley Kalms, will keep the equity it gets in Wanadoo. So the prospect of £1.2b worth of stock hitting the market will probably push the Wanadoo shares even lower than the current 11 euros. And today's price is well below the 19 euros it was priced at when it came to the market in July this year. Even so, Dixons will probably still walk off with over £1b from its two-year flirtation with the Internet. It must be well pleased with the whole affair.

Retail investors are likely to be less enamoured of the exercise. True, they haven't lost much money, and they could have made a bundle it they had sold anywhere near the peak of 920p. Indeed, compared to the market as a whole they won't have lost much because the shares have only modestly underperformed. It could be argued that investors have lost about £81 in interest they could have got from their £750 over the period, but against that was the potential to have realised over £4,000 from that initial stake at some point.

Freeserve was always a high-risk share. Indeed, the LSE bent the rules to allow it to be listed. But if new investors have ridden this stock and made some money, or not lost too much, is that such a bad thing? It did of course pave the way for a lot of other issues that have been less successful, so perhaps that wasn't so good.

What do you think? Was the Stock Exchange right to relax the rules for Freeserve? Tell us in the poll on the Freeserve discussion board.

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