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Freeserve IPO under fire
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July 15, 1999: 8:22 a.m. ET
Analysts question valuation of planned IPO for U.K. Internet phenomenon
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LONDON (CNNfn) - The planned initial public offering of U.K. Internet phenomenon Freeserve has come under fire from some analysts, who are warning would-be investors that the valuation does not compute.
Analysts say the current free Internet service provider (ISP) model is running out of time, and to become a sustainable business Freeserve will have to re-invent itself as a portal. Freeserve has grown rapidly to become the U.K.'s largest access provider since its launch last year.
Earlier this week, Freeserve's owner, electronics retailer Dixons, put a value of up to $2.4 billion on the ISP. But technology consultant Broadview calculated that this figure puts Freeserve in second place behind only America Online (AOL) in terms of value per user.
"Because the free ISP model is moving inevitably to a portal or content provider model, Freeserve must be compared with the U.S. universe of Internet companies, which are publicly traded," said Broadview, a technology-oriented investment bank.
According to Broadview's calculations, Freeserve is valued at around $1,500 per user, behind the $3,000 for the world's largest ISP AOL but ahead of the $1,100 for leading portal Yahoo! "It is even valued above Yahoo!, which has clearly built a global brand name," Broadview said.
In revenue terms, the valuation also is highly questionable. AOL has revenue of $4 billion, Yahoo! comes in at just under $300 million, whereas Freeserve has revenue of just $4 million.
Miles Saltiel, technology analyst at WestLB Panmure in London, also is highly skeptical of the price Dixons is asking investors to pay based on both comparisons with U.S. companies and future projections for the business. "We can't get anywhere near the heady revenue estimates of Freeserve's promoters," he told CNNfn.com.
Saltiel also worries about a declining market share for Freeserve, which currently stands at around 28 percent. "Freeserve won't continue to enjoy as good a market share as it has today. There is no doubt competition is on the increase, not least from digital TV," he added.
Free ISPs have mushroomed in Britain since Freeserve pioneered the business. The latest to offer free Web access is soccer club Manchester United, which announced its plans Thursday. Other clubs already have created similar units, as well as supermarket and music retailers.
Dixons has been accused of looking to cash in on the huge initial success of Freeserve by making only a small amount of the stock available. The company plans to list 18.25 percent in London and New York July 26.
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