Tiscali may have paid the price for being the last of the big independent ISPs in Europe to put itself up for sale. Recessionary factors have interfered with its exclusive negotiations with BSkyB, which won the courtship battle for the assets which Tiscali holds in the UK. Now the deal is off. Back in November these 1.8 million internet subscribers were considered to be worth around £450 million, around $720 million, a figure which now would be closer to $620 million just on currency fluctuation.
BSkyB came out ahead of Carphone Warehouse, BT and Vodafone. Back in May Tiscali published a short list of bidders which included those bidding in Italy for the Italian assets as well. These included Vodafone, British Telecom, BSkyB, the Swisscom-owned Fastweb triple play in Italy, and Wind Communications, another Italian company owned by Orascom. Carphone Warehouse was not in the list but was also publicly known to be keen. It was Carphone Warehouse and Sky neck and neck until in November it all seemed to be sewn up.
But the deal has taken too long to close, perhaps this was gamesmanship by BSkyB or perhaps it genuinely was the difficultly in putting a value on an asset, as economic factors changed.
Tiscali has now missed a key debt repayment, and in the current climate, while cash is tight, the fact that it has hundreds of millions of dollars in assets, counts for not very much. Right now, after a 40% slide in its share value on the back of a sell note issued by Citi Group in Italy, and with the deal being called off, the entire operation is worth only $130 million or so, and that includes the 580,000 subscribers in Italy. A year ago the whole company was thought to be worth in excess of $2 billion.
Italia financial analysts are worried that if the company cannot find money for debt repayments or arrange debt re-scheduling, then the value of the assets will be picked up by debt holders for a song, and shareholders will be crushed, probably by a debt for equity swap which will dilute shareholders out of existence.
For our money the UK assets are too pivotal. It has the ability of seeing BSkyB overtaken by Carphone, or Orange or even O2 Broadband, and a deal could be done by two willing parties in a couple of days, if one of them comes up with the right price. Vodafone is perhaps no longer quite so keen to acquire broadband lines, but its cellular entities now have access to them for a quadruple play in France, Italy, Spain and Germany and not in its native UK, where it wholesales them from BT. Also a deal might be arranged the other way around, where Tiscali keeps the UK assets and sells off the Italian business, just to stay liquid and ride out the recession, despite the fact that local businessmen on the island of Sardinia, where the company started, own controlling stakes.
Vodafone is one company which could still acquire the whole group, merging the Italian assets with the Tele2 Italy ISP that it bought there 18 months before. In October 2007 Vodafone bought the Italian and Spanish arms of Tele2, paying some $1 billion for the privilege. But perhaps the performance at these acquisitions in a recession has been troubled both to Vodafone and other broadband giants, and that’s why valuations have plummeted.
During the past year Vodafone has launched a quadruple play around its Arcor ISP in Germany which has only 2.6 million lines, in the same order of magnitude as the number which are up for sale at Tiscali. Vodafone had previously left these German assets lying fallow, virtually running themselves, since it picked them up as part of the Mannesmann acquisition in 2000 and only began to work them into the mobile offering over the past two years or so. We would have though that the quad play with these would be very valuable but perhaps that has not worked in Germany or else it would have been more eager to win the battle for Tiscali.
When it last reported Tiscali was getting around $220 million revenue per quarter from it UK broadband and Homechoice IPTV service, while getting around $90 million from its Italian operations.
Tiscali this week said it would ask bankers to suspend interest payments but they may smell the blood of extraordinary gains and behave rather more ruthlessly. In total the company has debts of around $600 million most of which is a loan and the rest are credit facilities.
Our bet is that Tiscali shareholders will be diluted, the debt partially swapped for equity to give banks even more control, and all sale deals mothballed until after the current economic crisis, when it the entire company will be sold to the highest bidder, with most of the money going to its debt holders. No wonder investors are running scared.