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Tuesday, January 16, 2007

Pipex: Trading Update

This morning Pipex released a Trading Update. Despite, three acquisitions (Homecall - £44m, Toucan - £24m and Bulldog - £12m) in the last twelve months, Pipex appears to be going nowhere fast in the home division. Broadband customers appear to be stuck at 570k and although ARPU is claimed to have increased most of this will have been caused the acquisition of high spending Bulldog customers.

The Bulldog acquisition also brought with it a wholesale deal for DSL services from Cable and Wireless and Pipex doesn’t seem to be using the service too much continuing its own unbundle programme (100 exchanges planned by Mar 2007 and 175 by year end 2007) and having 20k customers on these exchanges. I am extremely confused about the state of the Pipex unbundling programme and this is a key consideration for the value of the company as it determines how many costs a potential acquirer could cut by migrating the Pipex base onto its own infrastructure.

The Domain Name and Hosting business seem to be performing nicely and although a lot smaller in scale than the residential business is probably the Pipex jewel in the crown. The added bonus is that any acquirer purchasing this business unit gets the major seat at the table for Nominet, which is the UKs Internet registry.

The third leg of the Pipex mini-empire is the WIMAX start-up which seems to have expanded the trial beyond Miltion Keynes and has signed up another smallish UK local government in Warwick for further trials. The problem as I see it is that 3.6GHz spectrum is pretty naff and needs a lot of base stations to get decent coverage, hence the partnerships with local council who can hand out rights of way wthout the need for expensive planning permission. WIMAX definitely has a bonus compared to WiFi in that thespectrum is not shared other technologies, but it has another disadvantages in that WiFi cards are already contained in a lot of laptops and some of the more esoteric claims of WIMAX such as hand-offs are still at the powerpoint slide stage of development.

All told I am hardly surprised that the company has effectively been put up for sale.

I think the best fit for the company is BT who could realise the most cost savings from the home division, although a lot of effort would be required to merge the companies and systems which could ruin the economics. I’m sure that BT would love the hosting assets. I’m also sure that BT would not want to pay hyped prices for the WIMAX spectrum and this is a potential show stopper. However, any buyers have in their favour the recent auction of similar spectrum in Germany which only realised a mere €65m with multiple license winners. The market capitalisation of Pipex is £300m with approx. £50m of debt which is chicken feed for BT.

The Times article mentions Carphone as a potential purchaser but I can only see them interested in the home division and is probably too busy currently trying to ingest AOL to try anything too else tricky. I can’t see BSkyB being interested although its main competitor ntl could be.

All told, I don’t think it is a good time to sell the assets and Pipex is probably six months too late in putting itself up for sale to realise peak price for shareholders.