Freeserve Valued at $2bn

Computergram International, July 13, 1999

Dixons, the UK electronics retailer, will price shares in its UK internet service provider Freeserve at between 130 and 150 pence when it brings it to market in August. The price values the company at between 1.31bn pounds and 1.51bn pounds ($2bn and $2.3bn). Although the valuation is lower than many forecasts predicted, it still values each subscriber at $1,545 and $1,772 each, despite the fact that Freeserve's revenues reached just 2.73m pounds ($5m) in its first eight months of operation.

The London Stock Exchange and Nasdaq listing seems likely to set the ball rolling for a net stock frenzy like that experienced in the US recently, which could explain Freeserve's caution. The valuation is likely to swell soon after the float, due to the firm and analysts emphasizing that the majority of the ISP's revenues are not to come from the interconnection revenues it creates when a user dials into the service, but from e-commerce sales and related brand loyalty. In the long term, the average subscriber could be worth more than is currently touted.

To push this point home, Freeserve made two related announcements yesterday. It said it will acquire Babyworld.com Ltd for 3.7m pounds ($5.7m), offering $3.1m in cash, the rest in shares at the IPO price. Babyworld provides online information and sales to pregnant women and parents with young children, and will become part of Freeserve's growing content offering. Freeserve will also launch a credit card with HFC Bank, a subsidiary of Household International Inc. The branded card will not only create extra revenues from customer referral commission, but will enable users to pay and check their credit online, which should go some way to encourage online shopping.

On the back of the Freeserve float, other European companies are intending to follow suit with high-profile IPOs. QXL Ltd, the online auction house, is expected to value itself close to $700m with a September offering (NBD 07/07/99), while online games firm Gameplay.com will float half its shares on London's Alternative Investment Market to raise $31m. Gameplay will also buy British Telecommunications Plc's Wireplay gaming subsidiary for 5.5m pounds ($8.6m) and Interactive Commercial Services Ltd, an online games retailer, for 5.1m pounds ($7.9m).

The 18.25% minority offering in Freeserve should net parent company Dixons Group Plc almost 300m pounds ($465m). First conditional trading will begin July 26 and full trading on Nasdaq and the LSE will begin on August 2. Because of the expected demand for shares, retail investors will be limited to a minimum of 250 pounds worth of shares, and Freeserve subscribers will be given preferential treatment in the case of the retail shares being oversubscribed.

Freeserve is the UK's largest internet service provider by subscriber base, with 1.32 million active accounts (defined as accounts active in the last 40 days) and a 31% market share, according to Fletcher Research Ltd. The ISP redefined the market when it launched last September, spawning 200 (at last count) imitators.