The Anglo File: Thus Spoke Scottish Power - TheStreet

The Anglo File: Thus Spoke Scottish Power

Putting a name on its telecom/Internet unit prior to a public launch, Scottish Power goes biblical.
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One day, the chief executive of


(SPI) - Get Report

went forth among the rich and the poor -- though mostly the rich -- and saith unto them that henceforth,


would be known as



If you think that Thus is a rather incongruous new name for the utility's telecom subsidiary -- due to be floated by the end of the year -- you may have a point. However, it's unlikely the flotation of the telco will be any less successful for this somewhat odd reincarnation.

By creating Thus, Scottish Power has bundled under one roof its telecom and Internet operations ahead of the IPO. Scottish Power announced two weeks ago that rather than perform a trade sale, it plans to float between 25% and 49% of its telecom and Internet businesses -- minus the mobile phone operations -- by the end of this year.

Valuations for the business range from 600 million pounds to 1.6 billion pounds, although most observers are estimating that Thus will be worth around 1.4 billion pounds, making it Scotland's largest IPO to date.

And He Asked Unto Me, How Much Are You Worth?

Scottish Telecom's valuation is based on a comparison to a telco with a similar history and business mix named



, the offspring of

National Grid

. Scottish Telecom was born out of Scottish Power placing telecom wires along its electricity-line network, while National Grid, the English and Welsh electricity distributor, did the same to create Energis. Both companies provide voice, data, call-center services and Internet services. Energis was spun off two years ago and its stock price has risen 81% over the past 52 weeks.

On the negative side for Scottish Telecom is that although its network is somewhat similar to Energis,' the population -- and population density -- in Scotland is much smaller than that in England and Wales, and as a result the capital-to-revenue ratio for the business is not as attractive as that for Energis.

Thus also includes the subscription-based Internet service provider


, which was bought by Scottish Telecom in 1998 for 66 million pounds. At that time, Demon was the U.K.'s largest ISP, with 180,000 active subscribers. However, it has since been eclipsed by the arrival of subscription-free ISPs such as



, which as of September had 1.48 million active users.

According to a recent survey by the London-based media consultancy

Fletcher Research

, only 5% of home surfers now use Demon to access the Internet, compared with 31% who use Freeserve.

But He Saith Unto Me, Look at the Revenue Growth

Despite these shortcomings, analysts such as Simon Flowers at

Merrill Lynch

believe Thus is a "hidden gem." Merrill has an accumulate rating on ScottishPower and has no investment banking relationship with the utility.

Thus' key asset is the network infrastructure in Scotland, which has been extended through interconnects and partnerships to give it local, national and international reach. In the fiscal year ended March 31, revenue for ScottishTelecom doubled to 166 million pounds.

The telco was ranked in 14th place in the accountancy

Deloitte & Touche's

1998-99 survey of the U.K.'s 50 fastest-growing technology companies, with revenue growth of 613% during the period between 1995 and 1997.

According to Scottish Power, Thus will use the proceeds from the IPO to further develop integrated Internet, e-commerce and data services over a pan-U.K. network. Until now, ScottishTelecom has concentrated on developing its corporate customer base in Scotland. It now has 500 corporate customers, giving it a market share of about 8% of the corporate sector for data and telecommunication services in Scotland.

Prospects for the Internet side of the business are not all doom and gloom because of the rise of the subscription-free ISPs. Despite still charging a subscription, Demon has grown its Internet subscriber base since the acquisition by 80,000 to around 260,000, including 34,000 users in The Netherlands.

Scottish Telecom has also launched a subscription-free ISP called


in partnership with the multimedia retail chain

The Electronic Boutique

retail chain. Marketing the ISP through its own base of 5 million customers, and those of Electronic Boutique, has allowed it to already sign up about 15,000 subscribers.

Thus' Internet operations also handle the traffic for

News International/ASDA's

free ISP launched through the U.K.'s biggest selling newspaper

The Sun

, and Demon provides back-office services for


in the U.K.

Given the market's enormous appetite for telecom stocks, it is expected that Scottish Telecom's IPO will be a success. Scottish Telecom is no doubt praying that it will indeed be Thus.