The Anglo File: Scoot.com Stock Rides Up With a Little Help From Merrill

Merrill and the market are quite excited about the directory-services company's move to a transaction-based business model.
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U.S. television viewers haven't been treated to the rather unnerving sight of a pinstripe-suited man with a very large purple head and yellow eyes running around London and directing people to various shops and businesses.

However, it seems that Scoot, the purpled-headed man in said ad, has caught the eye of

Merrill Lynch

, which initiated coverage Tuesday of the Internet and telephone directory-services company

Scoot.com

(SCOP:Nasdaq) with a buy rating.

Scoot Scoots Up the Market

Merrill's somewhat short four-page buy recommendation report brought immediate dividends for Scoot.com as its shares closed up 27% Tuesday at 50 pence. The shares closed Wednesday 6.6% higher at 53.5 pence, bringing the company closer to Merrill's 12-month price target of 87 pence and away from the 19 pence around which it was languishing in January.

What has Merrill -- which has no investment banking relationship with Scoot.com -- and the market so excited is Scoot.com's move to a transaction-based business model with its Scoot Connect telephone service. The Scoot Connect service is more advanced than the simple toll-free, operator-assisted classified directory service the company offered in 1997.

"With Scoot Connect, consumers calling in to the service can be transferred immediately to the directory advertiser meeting their needs, while advertisers pay a results-driven connect fee based on the value of the lead provided by Scoot," the report noted.

With this new pricing model, Merrill predicts that Scoot.com's U.K. business will turn EBITDA (earnings before interest, tax, depreciation and amortization) positive in the second half of fiscal 2000 (ending Sept. 30), and its operations in the Netherlands and Belgium to turn EBITDA positive in the first half of fiscal 2001.

Scoot Scoots Onto the Net

Merrill praises Scoot.com's quick uptake of new technology, such as the Internet and mobile telephony. The bank notes that in each of the countries that Scoot.com has entered, it has become the top fixed-line, mobile and Internet-access directory, based on consumer usage and subscriber revenue.

Much of this forward thinking is attributed to Scoot.com's young and vibrant management team, headed by CEO Robert Bonnier, who created this new business model for the company.

Nainish Bapna, an analyst at

Nomura

, agrees that Bonnier is a driven man, but feels he has slightly lost focus and is spending too much time and money than is wise on building a brand name at the expense of basic services. Nomura has no investment banking relationship with Scoot.com.

"Building a brand name is the way to go in the long term, but The City

London's financial area is a notoriously short-term place, and you need deep pockets for this approach, like

Amazon

(AMZN) - Get Report

, who can use their highly valued stock as currency," Bapna says.

And cash on hand has become a real problem for Scoot.com. The company admitted in its most recent annual report that it has limited financial resources at the moment and needs a significant amount of new funding, perhaps through a venture partner, if it is to move forward with its international expansion plans.

Merrill also conceded Bapna's point that, from 1997 to 1998, Scoot.com did overextend itself and as a result was not always able to "fully deliver on what it promised." Yet Merrill's report indicated its belief that the company has addressed these issues.

Merrill's projections for Scoot.com are certainly aggressive, and it will take a monumental effort by the company's management team to meet these predictions. However, if you asked the man with the large purple head where Scoot.com is headed, he'd probably point to the sky.