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Thursday, July 1, 1999 Published at 17:29 GMT 18:29 UK

Business: The Company File

Freeserve flotation price puzzle

Freeserve could be used to offer discounted Dixons goods

There is something of a buzz in the markets about the forthcoming flotation in London and New York of Dixons' popular Internet service provider, Freeserve, not least because there are widely differing views of how much the company is worth.

A minority stake in Freeserve of about 18.25% is to be offered, with another 1.75% going to the telecoms company, Energis, in return for changes to the contract under which it carries Freeserve's traffic.

[ image: Dixons hopes to capitalise on the rapid growth of Internet use]
Dixons hopes to capitalise on the rapid growth of Internet use
Launched last September, Freeserve quickly became the UK's leading access provider, with 1.25m users. Investment analysts have estimated its value now at anywhere between £800m and £2.6bn ($1.28bn and $4.16bn).

On Thursday, Dixons shares rose sharply in response to the strength of US Internet stocks as the markets took a bullish view of Freeserve's likely offer price. There is much concern over the company's future, however, which has contributed to the big variance in estimated values and tempered enthusiasm.

Highly competitive market

A rival service,, has claimed it has poached thousands of users from Freeserve in a matter of weeks, and AOL Europe has said it is thinking about offering free Internet access in the UK.

Microsoft Network recently decided to offer its services for free to UK customers, and the BBC has said it will be offering free Web access later in the summer.

On top of this, Dixons has revealed that Freeserve lost £1.04m ($1.66m) on revenues of £2.73m ($4.37) in its first eight months of business.

With the market for Freeserve's services so fickle, so many other big players entering the fray and its potential profitability still unproven, how can the company be confident about retaining its position as the UK's leading Internet service provider?

Electronic marketing

The key is how Freeserve stands to make money. Its revenues come from phone call charges while users are online, advertising and e-commerce.

It is particularly the latter that has excited some investors. One of the problems of valuing Freeserve is understanding the nature of its business and how it will develop in the future.

[ image: Freeserve can give Dixons a bigger shop-window]
Freeserve can give Dixons a bigger shop-window
It can be viewed as an electronic version of a mail-order company. As well as making money by providing users with Internet access and acting as a billboard for advertisers, Freeserve can be an effective sales vehicle for Dixons' products.

Justin Urquhart Stewart of Barclays Stockbrokers says Dixons would benefit from selling the shares cheaply because the value of the flotation to the company is not so much the money raised as the size of the database of potential customers it gains.

"If half a million people become shareholders, that gives Dixons a stronger loyalty base than any exisiting loyalty card operators, such as Sainsbury's and Tesco's", he says.

Internet users with a stake in the company would be expected to be more loyal than those who do not, and Dixons could offer them its products online at a discount.

If the strategy works, the customers get cheaper goods and both Dixons and Freeserve make money.

Risky business

Mr Urquhart Stewart says the drawback is risk, because no one quite knows where e-commerce is going: "This year's fashion could be next year's tank-top".

Selling the shares in both London and New York gives Freeserve greater access to private investors who are enthusiastic users of the Internet, rather than institutions who are more wary of the risk.

Mr Urquhart Stewart says he would be very cynical if the flotation were of an Internet service provider without the link to a tried and tested company like Dixons.

He says Freeserve is essentially an Internet marketing operation, while Dixons is a very effective electrical retailer with a strong marketing track record. And that gives Freeserve credibility.

Dixons' share price has more than doubled since the launch of Freeserve, from 599 pence on 22 September to 1286p on 1 July.

Prospective investors must register online with Freeserve by 9 July. The minimum application is £250 ($400) and priority is being given to existing Freeserve users.

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