FOOL'S EYE VIEW
Why Not Freeserve?

By Alan Oscroft
December 19, 2000

Liverpool -- All new industries grow up, and I think it's fascinating to watch exactly how the process evolves. Part of that process involved mergers and acquisitions, and so I met today's announcement that Energis (LSE: EGS) has taken a 75% stake in German website hosting business Ision with some interest.

Rob Davies offered his thought on the deal earlier today in this market comment, and I agree with him that Ision is a sensible strategic move for Energis, and that the price paid isn't too high.

Why Not Freeserve?

Energis, though, is a strategic partner of Freeserve (LSE: FRE) and provides Freeserve with the telecommunications services that it requires. It was common knowledge that Freeserve had been up for grabs for a long time with few companies showing any real interest, so why didn't Energis go for a majority stake in Freeserve if it's after some ISP action? Well, that's a question that I pondered from my bed this morning while flicking through the BBC2 business news pages, anyway.

Freeserve is, of course, already in the process of being snapped up by Wanadoo (which itself has France Telecom as its majority shareholder) after Germany's T-Online balked at buying it for a rather more substantial price earlier this year.

As Rob tells us, Energis is buying Ision on a Price to Sales Ratio (PSR) of 12.2 (based on annualising the first 9 months sales from this year) which, while high by average stock market standards, is by no means an excessive valuation for a venture with high growth prospects. And as Energis is using its own highly-rated shares as part payment, it has a significant bit of protection built in to the deal.

Valuations

Ision achieved £24.9m in sales last year (€40.9m) and if its first 9 months sales this year continue at the same rate, it should expect to achieve around £54m (€90m) in sales this year, which would keep the prospective full year PSR at 12.2. Freeserve managed a rather similar £19.6m last year, and projecting this year's interim forward, we could be seeing something like £60m for the full year.

Using these figures (and simple pro rata projections) and yesterday's close of play market capitalisation figures, here's what the historic and prospective PSRs of the two companies might look like...

Company      Historic        Prospective
          Full Year PSR     Full Year PSR

Ision         26.8             12.2     
Freeserve     58.8             19.2

Business Models

Sales-related valuations only tell one small part of the story. In the long term, successful ISP business will come from companies that have good business models. And all good business models revolve around revenues and, more importantly, profit.

Freeserve has always been aimed squarely at domestic users, and in its short life has done an impressive job of attracting a very large user base. But, as I have opined on more than one occasion, its business model was never going to be successful as it stood. Offering flat rate Internet access for £10 per month, with no further obligations (just a weekly Freeserve newsletter that many people delete without reading), was never going to be profitable. No Freeserve user can have failed to spot the mail sent earlier this month announcing the forthcoming Freeserve Anytime, a new and apparently identical replacement service, but at a price of £12.99 per month.

£12.99 per month does seem to be the going rate these days, with BT's new unmetered access, planned for January, coming in at the same price.

Corporate Business

Where Ision differs is that it is aimed squarely at business users with, as Rob informed us, eight of Germany's top media companies and three top banks among its customers. Ision-hosted sites account for 23% of Germany's page views.

That business model, where extreme high quality of service is essential, is attacking the high-margin end of the Internet service business where customers are happy to pay higher prices for top quality service.

So yes, I can see now why Energis went for Ision and not Freeserve.

Where Next?

Market Comment -- Energis buys Ision
Market Comment -- Freeserve Interims
Energis discussion board
Freeserve discussion board