Saturday, August 13, 2005

Energis, what did £800m buy C&W?

On Friday the 12th August 2005 and after many recent rumours, Cable & Wireless publicly confirmed that it was making a £780m bid to buy Energis. Energis was founded in 1993 by the UK National Grid Group and by 1997 was listed on both the London Stock Exchange and US NASDAQ. At its peak, the target had a 20,000 km pan-European IP network and operations in Germany, Poland, the Netherlands and Switzerland. However, by February 2002 debts levels had reached 2 billion Euros, forcing a sell off its European operations and retreat to its core UK market. In July 2002, a group of the company’s bankers re-structured, firstly by placing the existing business in administration and then creating a new company. 'New Energis' was given £150m and the old debt was converted into equity. Energis was de-listed from both UK & US exchanges.

Using our proprietary "Zero Sum" evidence-based market reporting software, Backchannel puts Energis under the microscope and examines their presence among FTSE350 accounts, charts their position versus the competitors, and has followed a group of 640 of their Dedicated Internet Access customers over the past 6 months searching for indicators of future performance.

Market Share FTSE 350
Dedicated Internet Access March 30th 2005
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Energis has little market share in the FTSE350 for Dedicated Internet Access, and has failed to improve upon this low base in the last 12 months. At the beginning of April this Year, Energis had only 11 customers in the FTSE350 market, trailing smaller organisations such as Telstra UK (PSI Europe's UK business, acquired for £50m in August 2004). Although Energis has been able to hang on to most of their large accounts, there have been some high profile defections over the last few months. Simple arithmetic tells us that an Energis/C&W deal would not change the overall market share rankings for Dedicated Internet Access in the UK, given BT and MCI's huge lead on the competition.

Market Share FTSE350
Hosting & Collocation March 30th 2005
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Energis has a slightly better share in the Hosting/Colocation market, largely due to the historical strength of an acquired business in this area (Leeds based ISP Planet).

As previous reports have shown, this market is incredibly fragmented, with full service boutiques consistently punching above their weight in the presence of Carriers like BT, MCI, and C&W. In previous reports we have also highlighted the fact that the prevailing churn is from larger carriers to smaller boutiques, who are then able to consistently retain these customers. Should an Energis/C&W deal succeed, the combined entity will instantly become the largest provider of Hosting and Colocation facilities to FTSE350 customers.

Window On Future Performance?
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Energis customer churn for Dedicated Internet Access was 25% (gross) between January and July 2005.

640 customers of Energis Dedicated Internet Access product were tracked for the first 7 months of this year, in order to get a feel for the underlying churn rate for the business and to ascertain which UK carriers were having most success at winning accounts away from them. The results revealed a rate of churn significantly higher than their peer average. Although most major accounts did not churn to an alternative provider during these 7 months, there were some significant defections including Prudential, Transco, and the Post Office. As anticipated, BT picked up the most customers.

Energis is 7th placed in the Dedicated Internet Access market, and a 5th placed player in Hosting and Colocation for FTSE350 companies. It has not managed to crack 5% share in either category. Recent churn figures, coupled with the loss of some big name accounts give cause for concern. If the 640 tracked customers are indicative of the rest of the IP business, then timely intervention is required to stem losses and manage cash flow with a backdrop of fixed network costs supporting a shrinking customer-base. Assuming this level of customer churn continues unabated, it raises the question of how long a potential acquirer can count on the predicted value of future cash flows. The annualised rate of churn for the profiled product is near 40%, customer bandwidth prices are still falling thanks to business broadband and LLU, the price of Carrier Pre-Select voice minutes decline towards zero. If it makes sense for the 5th and 7th placed player to roll up, how long do Easynet, Star, Mistral and PIPEX have as independents?

Wednesday, May 04, 2005

Verizon declares interest in MCI

Over the last 5 years MCI's IP market share in the UK has been steadily eroded by price gouging competitors and Chapter-11 zombies, reanimated through debt for equity swaps or the favor of wealthy private benefactors. Now, just as clear weather seemed to be breaking over "new MCI" there was one last thunderclap.

We are lead to believe the final installment in this saga will see MCI acquired for $8.45Bn in cash and stock by Verizon the local North Eastern Baby Bell. Verizon was playing catch-up after the SBC/AT&T deal struck in January created the No. 1 U.S. long-distance phone company. Ironically SBC and Verizon do not own global networks and mostly catered to consumers, offering local calling, high-speed Internet access and wireless services. A quick examination of Verizon confirms that it is a very US-centric business with $71B annual revenues from two main business units, fixed line operations in 29 states and wireless serving 43.8M subscribers across the US. The only international revenue appears to come from directory services and ownership of minority stakes in some wireless operators. In total about 3% of revenues.

For customers who sat tight during the discovery of $11Bn worth of books cooking, and have been getting daily updates of the ensuing court room drama, this deal could represent stability or the beginning of yet more uncertainty...

Speculation surrounds the global parts of MCI, Europe and Asia-Pac. With shareholder value the priority, what will be the fate of MCI rest-of-world? Backchannel invites you to view accurate customer metrics on possibly the largest MCI op-co, the UK.

Market Share FTSE 100 Dedicated Access
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MCI has 23% of FTSE100 Dedicated Access business by customer numbers. MCI has been losing its early lead for some time and continued to slide over the last quarter, with Great Universal Stores (Experian) falling to NTL. Even though churn among the FTSE100 is low compared to the industry average, as the dominant player MCI has most to lose. The firm's performance is in contrast to other Tier-1 competitors who have consistently gained ground.

Churn & Retention
Dedicated Access Culmative Win/Loss

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The top end of Dedicated Access is stable while Hosting & Collocation churns. The chart shows relatively little churn in the Dedicated Access market over the last few months. However the picture for MCI is less favorable for Hosting and Colocation, where the company had a far smaller base to begin with. MCI or its VARs account for only a few percent of FTSE hosting and are down over the quarter after losing Rexam to BT and Allied Domecq to AT&T. Over the preceeding 5 months, MCI's hosting business has lost 3x more accounts than it has won. Customers will vote with their feet when it comes to deciding if the merger makes them feel more or less secure in MCI as a supplier.

Reliability & Service Levels
MCI Performance relative to Industry Average Time to Repair

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MCI fixes outages 34% faster than the industry average. MCI is a very strong performer for reliability and time to repair. It easily exceeds the industry average time to repair for Hosting and Dedicated Access. MCI customers suffered fewer outages of shorter duration on average than many of their competitors. It will be interesting to track this reliability as MCI's new parent may look to cut operational costs.

Verizon are about to inherit a company with more FTSE100 Dedicated Access customers than BT, one of the largest market shares for hosting and colocation, and a network whose reliability has remained strong throughout recent corporate dramas. Will they cash-in the non-US operating companies and break up the family estate? Does their vision stretch beyond the US for the company that was once called "WorldCom"?

Thursday, April 28, 2005

PIPEX acquires Donhost

This morning PIPEX Communications announced the latest in a line of recent UK acquisitions that will bring Donhost's dedicated and shared hosting and domain name business into their portfolio. Privately owned and founded in 2000, according to company literature, Donhost boasts cost effective web hosting solutions to private entrepreneurs and SMEs as well as major corporations throughout the world. It is believed that PIPEX was particularly interested in Donhosts capability to service the large and fragmented reseller community for hosting services.

Using our proprietary "Zero Sum" evidence-based market reporting software, Backchannel puts PIPEX and Donhost under the microscope and examines their presence among FTSE350 and FTSE100 markets, charts their position versus the competitors, and looks for indicators of future performance.

Market Share
FTSE 350 Hosting & Collocation

Pie Chart

Donhost supplies the SME market segment, and has no material market share among FTSE350 companies. This is a business focused on volume, indirect sales and automated fulfillment. Donhost provides for just 1 FTSE350 customer (Severn Trent Water) whose dedicated Internet access is currently supplied by BT. This acquisition takes PIPEX hosting within the FTSE350 market to 12 customers, Roughly equal to Telstra UK (formerly PSInet UK) and slightly behind Energis. Donhost claims 92,000 customers of 'hosting services', one must assume that these are small businesses or sole traders. Will PIPEX successfully eject BT's Internet service from Severn Trent and replace it with their own?

Market Share
FTSE350 Dedicated Internet Access

Pie Chart

The Donhost acquisition has no impact on FTSE350 Dedicated Internet Access, where PIPEX continues to outperform Easynet & Telewest, but further emphasises PIPEX lack of product cross-selling between hosting and access business units.

The PIPEX connectivity business has a small but significant market share, of FTSE350 dedicated Internet access. PIPEX continues to perform more strongly than Easynet and Telewest in market share, but has been unable to gain any ground on the 7th placed provider Energis within the last 7 months.

PIPEX have thus-far been unable to cross-sell both Hosting and dedicated Internet access to FTSE350 customers. 10 of the 12 PIPEX FTSE350 hosting customers chose to place their order for dedicated Internet access with an alternative supplier. Given the high cost of acquisition of direct-sold corporate customers and PIPEX fondness for M&A, one wonders why more focus is not given to cross-selling.

Reliability & Customer Service

PIPEX reputation for reliability is expected to persist throughout the integration of this latest acquisition. Neither PIPEX nor Donhost have suffered any significant customer outages observed by Zero Sum in the last 7 months, indicating a high quality infrastructure with a capable customer service desk. This strong performance is in spite of the customary upheaval of multiple acquisitions which can sometimes lead to a decline in quality of service.

PIPEX & Donhost Combined
FTSE350 Hosting & Collocation Customers

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PIPEX & Donhost Combined
FTSE350 Dedicated Internet Access Customers

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