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Freeserve IPO: Get on line
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July 23, 1999: 11:25 a.m. ET
Europe's first Net offering is 10 times oversubscribed as institutions pile on
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LONDON (CNNfn) - Freeserve, Britain's pioneer subscription-free Internet service provider, is drawing a crowd to its initial public offering, with bankers close to the deal saying Friday that the issue has been 10 times oversubscribed by fund managers and institutional investors.
Applications closed Friday for Europe's biggest Internet IPO to date. Shares will list in London and New York Monday.
Dixons, the British electrical retailer that launched Freeserve last September, has watched the ISP's membership roster swell to 1.32 million - drawing a multitude of no-fee copycats in its wake. But Dixons is only selling one-fifth of Freeserve in its initial offer -- creating a scarcity that has only whetted investors' appetite further.
In unofficial "gray" market trade in London Friday, Freeserve shares were quoted in a range from 210 to 217 pence, a 42 percent premium to Dixons' price range of 130 to 150 pence, and up from Thursday's 190 to 192 pence range as reported by the Financial Times.
Based on Friday's unofficial prices, Freeserve's valuation has soared to 2.1 billion pounds ($3.32 billion) from the price range's implied value of 1.3 to 1.5 billion pounds ($2.4 billion).
"It's a testament to the resourcefulness of all concerned and the underlying attractiveness of the stock," said Miles Saltiel, a London-based analyst at investment bank WestLB Panmure.
How committed are these investors?
While he was careful to praise the early success of the issue, Saltiel noted that questions persisted about the long-term commitment of those currently buying in.
"The feedback we're getting from our clients is somewhat schizophrenic," he said, adding that while many buyers appeared hesitant, they also felt a certain professional obligation to snap up whatever shares they could get.
"This is an ambitious valuation and we have our own anxieties about the capacity of the business model to deliver," Saltiel said.
Part of the institutional interest in the Freeserve shares is said to be tied to a desire by investors with Dixons stock to underpin that company's strong performance. Dixons, with a market capitalization of nearly 6 billion pounds, has seen its share price double since Freeserve's launch in September, to 1,344 pence Friday.
Freeserve posted revenue of 2.73 million pounds through May, generated from e-commerce, advertising and a portion of connection fees it receives from a terminating operator that routes subscribers' calls from a local operator to the server.
Against this rosy sales backdrop, however, the company has posted a net loss of 1.04 million pounds ($1.64 million). The yawning gap between sales and profits has raised inevitable questions about Freeserve's ability over the long term to justify its stratospheric share price.
Using U.S.-based Web portal AltaVista - recently sold by Compaq (CPQ) to CMGI (CMGI) -- as a gauge, WestLB Panmure has determined that Freeserve's shares are actually worth around 45 pence each. Adding a one-third premium -- in deference to its soaring fortunes at the moment -- would yield an implied value of 60 pence per share.
The bank expressed concern that Freeserve would set a reckless precedent in the United Kingdom for Internet IPOs.
"It would be a shame if future U.K. Internet opportunities were seen only in the light of this transaction, as Freeserve has very much its own characteristics and its outcome -- for good or for ill -- need not set the tone for other issues," Panmure said.
--from staff and wire reports
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