Thursday, February 09, 2006

BT mulls £350m bid for PIPEX

Telco watchers have noted with interest recent speculation surrounding the future of PIPEX, one of the UK's best known suppliers of Broadband and Dial-up Internet access to small businesses and professional home users. The latest rumors are of a £350m (presumably cash) bid from BT. The job lot consisting of:

  • PIPEX brand, less of a draw than it once was, still has cachet.
  • Fast growing ADSL ISP, under margin pressure at the low end.
  • Domain business, slick provisioning and low running costs.
  • Hosting and Collocation, majoring on low-end shared servers.
  • Wimax license, proof of concept trial, lacks capital for build-out.
  • LLU proof of concept trial, but lacking capital for build-out.
  • Seasoned management from the XO, GX, and PIPEX family.
  • £12m cash.

Lots of obvious potential, strong broadband market share and growing, technical (but not financial) capability for entry into the LLU market, and an option on the future market for Wimax delivered services. With seemingly so much going for the business, some may be surprised at the premium of only £50m of this offer over PIPEX recent market cap.

Maybe BT knows something we dont'?

I'll leave you to chew on that while we move onto matters regulatory. One of Ofcom's largest projects has been the creation of a market for local loop unbundling. Simply put, granting the ability for other operators to place equipment in BT local exchanges and connect over the last mile directly to customers. The first mention I can find of Ofcom's (then Oftel's) support for unbundling was way back in the autumn of 1998. Formal announcement of a policy would have to wait till March 2000. Only now are we seeing in-scale deployments and smoother processes after many initial problems. Its been a long wait, and as former regulator David Edmonds described it a... "painful and often miserable process". Finally we have the beginnings of a competitive market in the last mile.

How can Ofcom wave through the removal of one of only a handful of potential market-makers in LLU at such an early stage? Providers have not yet finished LLU roll-out, let alone seen a penny of economic profit from what promised to be a disruptive technology. Perhaps if a deal does go through, conditions would be imposed similar to the failed BT/MCI merger of 1997, where certain business units would be spun out or sold to further buyers, if such buyers exist. One thing is for sure, after 12-18 months of deliberation and planning, what lead any such business unit may have had will have been lost to customer confusion and staff fatigue. At the end of such a process, you are lucky if either of the parties can maintain momentum. Which parts would BT retain? Wimax and the high volume, highly automated hosting and domain businesses.

Even if Ofcom is content to see a potential force in the LLU market de-fanged, why would PIPEX shareholders feel the same? After all, we have yet to see LLU deliver economic profit to shareholders, come to think of it.. we have yet to see broadband deliver sustainable economic profit. If shareholders bought into the growth story and the brave new world of broadband and LLU why would you cash-out this early?

Maybe the shareholders know something we dont?

What does this early surrender of a potential LLU player mean for other alternative network operators? With talk of C&W backing off from direct sales of its Bulldog products and going wholesale, when can the customer expect delivery of a rash of new and innovative products?

What if...

What if BT completes the build of 21CN just as the remaining LLU operators are delivering economic profit on their investments? We know that LLU is a 'bolt-on' and 21CN is a from-scratch new network, designed for lowest possible cost of delivery. BT then has the option of dramatically lowering prices, thereby stranding LLU investments of the competition just when their shareholders are due a return (or the bond holders are due a payment). Fire-sales, bankruptcy, and restructuring ensues (again) among the alternative providers while BT welcomes back old friends.

Maybe BT knows something we dont, maybe PIPEX shareholders know something we dont, either way both would do well to remember these rules:

  • Something is worth what someone will pay for it.
  • It takes at least 2 to make a market.
  • Never forget the golden rule (The guy with the gold makes the rules).

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