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Wednesday, August 30, 2006

Tiscali: Partner Pending?

There was an interesting comment at the weekend by the Tiscali CFO to an Italian newspaper where he said Tiscali was not ruling out seeking a partner.

The problem Tiscali have got is that they are short of cash and the German and Dutch ISP’s are not performing well. Of course, the UK is under the spotlight after the launch of not-so-free offers onto the market and the purchase of HomeChoice. The UK is especially important for Tiscali as it is the largest operation and contributes the majority of EBITDA – in Q1 2006 the UK contributed €15.7m out of a total group EBITDA of €29.2m.

In Sept 2006, Tiscali have to redeem an approx. €210m bond part of which will be repaid via new equity (approx. 7% issue of new shares) and partly through cash approx €130m. The cash element will be paid via an extension to a borrowing facility from a hedge fund. The total borrowing will be €220m at an incredible Euribor +8% (approx. 11%). Given that overall Tiscali is still burning cash, it will be extremely interesting to see how Tiscali gets out of its’ current cash squeeze.

It is in this context that I believe the decision by the owner of Homechoice to invest at the Tiscali UK level and not the Tiscali Group level should be seen. The majority owner of Homechoice was an ex-early Microsoft employee called Chris Larson who is probably sitting on big losses for his Homechoice investment having allegedly pumping in around £100m through the years. When he bought into Homechoice in 2001, he transferred the IPR to an offshore company which I suspect he still owns today with Tiscali having to pay a licence fee for the use of Video on Demand technology.

Tiscali itself is one of dotcom survivors having been formed by a Sardinian, Renato Soru who still has a significant 27.9% shareholding but has retired from the company to become the president of Sardinia. I suspect he will still exert significant influence on the company. In 2000, Tiscali meged with a scandal ridden Dutch based ISP called WorldOnline who happened to have €1.3bn of cash on its’ balance sheet and so became the original plan to build a pan-European network. In five years and after many years of wheeling and dealing the end result is no cash left, networks in the Italy, UK, Netherlands, Germany and Czech Republic and still burning cash.

Smaller shareholders in Tiscali include the Sandoz Foundation with 9%, who came along with the WorldOnline merger and are behind the Interoute Trans-European Fibre network and Kingfischer with 3% who can along with the French LibertySurf ISP purchase which has since been disposed of to pay past debts. The Sandoz board members resigned in May at the time of the agreement for the rearranged financing.

It is this context that I believe that Tiscali are struggling to find a suitable new partner for Mr Soru. Personally, I think Tiscali is lacking the financial firepower to compete in the new reality of the UK broadband market and will suffer from the lack of strategic direction from the Tiscali Group in the coming year. A cash strapped ISP will struggle to compete with BT, BSkyB, Orange and O2 who are prepared to sink many, many millions into the UK - £400m in the BSkyB case.