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
Pie Chart

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
Pie Chart

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?
Pie Chart

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?

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