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CSFB report hits Freeserve
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July 19, 2000: 8:36 a.m. ET
Broker doubles estimate of future loss, dealing a blow to British ISP's stock
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LONDON (CNNfn) - U.K. Internet service provider Freeserve Plc saw its shares drop 6.4 percent Wednesday as investors digested a report by CS First Boston, Freeserve's stockbroker, that predicted the company's loss next year would be more than twice the securities firm's original estimate.
Freeserve (FRE) shares shed 23-1/4 pence to trade at 339 pence a share on the London stock exchange. Analysts also cited the ebb and flow of buyout speculation about the company that has caused the stock to fluctuate. The shares rose 15 percent Monday on renewed buzz about a takeover bid.
Details of a CSFB research note released to clients on July 12 but unknown to the broader market until Wednesday showed the firm's analysts expect a pretax loss of £60.9 million ($91.2 million) in the fiscal year that ends in April 2001, compared with an earlier forecast of £27.4 million.
Analyst Shane Leonard, who leads a four-person team that authored the report, predicted a pretax loss of £40.7 million in the year that ends in April 2002, after earlier estimating a loss of just £21.2 million.
CSFB credited the free ISP for better-than-expected profit in its fourth quarter and said gross profit- the profit after the company deducts the cost of delivering its service - should rise by 11 percent to £40.7 million in the current fiscal year.
CSFB said the rollout of high-speed Internet access should boost Freeserve's advertising and e-commerce revenues. The firm also cited independent studies showing that Freeserve, Britain's leading ISP, has maintained or increased its market share. The analysts reiterated their "buy" recommendation on Freeserve shares, predicting a price of 496 pence for the shares within 12 months. 
In Britain, phone users pay their telephone company for the cost of a local call. While Freeserve doesn't charge users a subscription fee, it has traditionally earned income via deals that hand it part of the telephone call carrier's fee for each call to the Internet made by a Freeserve customer.
But the advent of high-speed access through specialized ADSL modems, plus Freeserve's own push to offer free dialup in off-peak hours for a cost of £5 per month, has prompted financial analysts to revise their expectations of Freeserve's revenue. The emergence of CSFB's report was a sign investors are coming around to that.
"Part of the reason [for the stock price drop] was obviously the report from CSFB," said Morten Andersen, an Internet analyst with Deutsche Bank, who is preparing to start coverage of Freeserve. Many analysts, he said, "realized the structure of our models has been inaccurate."
Freeserve's parent Dixons (DXNS), a U.K. electronics retailer, has been on the hunt for a buyer for its 80 percent stake in Freeserve. Media reports said over the weekend acquisition talks with Germany's T-Online were going ahead. Last month, Dixons said it had been in talks with the Deutsche Telekom unit and other potential suitors, but didn't expect that to lead to a deal any time soon.
"It's not the first time -- and certainly won't be the last - that someone says Freeserve will be taken over," said Tarek Robbiati, an Internet analyst with Lehman Brothers. He said the lure of Freeserve for a potential buyer was not for its Web access service - which offers no revenue - but for the reach it has in Britain, the No. 2 Internet economy in Europe after Germany.
"Clearly business-to-consumer firms are facing tougher times these days," he said. "Don't buy an ISP for the sake of its subscriber base but for value-added services and its portal, for example." 
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