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News Analysis
Light Reading
1/26/2004

A French ISP called Free is about to benefit from the first technology IPO in Paris in three years.

If things go according to plan, Free’s parent company, service provider Iliad, will float up to 15 percent of its stock on the Euronext Paris exchange later this week, which could raise as much as €95 million (US$118 million).

Iliad plans to use the cash to help accelerate Free’s rollout of DSL services in France. It’s already the second biggest provider, with more than 485,000 customers (about 15 percent of the national market). But the goal is to start catching up with the market leader, France Telecom SA (NYSE: FTE), which has about 3 million DSL subscribers. Other players in the market include Telecom Italia SpA (NYSE: TI), which launched in October, and French carrier Groupe Cegetel, which launched its service last week.

With new players emerging, and France Telecom boosting its broadband investments (see Europe Doubles Down on DSL), Free wants to take its triple-play offering of high-speed access, voice, and TV services to as much of the population as quickly as possible.

To fund the expansion, Iliad is offering 5 million new shares at a price between €14 and €16.30, which would raise €81.5 million at the top end of the scale, while a further 828,000 shares, worth €13.7 million at the top price, could be sold if an over-allotment option is fully exercized. The final price will be announced this Thursday, and trading of the Iliad shares will begin Friday.

In addition to the new shares, Iliad investor Goldman Sachs & Co. is to place 1 million shares of its stock as part of the flotation, and may extend that offering by a further 900,000 shares. Goldman Sachs acquired 6.9 percent, or about 3.6 million shares, of Iliad in 2000 for about €10.4 million. Now that stake is worth between five or six times as much.

AXA Private Equity is also a minority shareholder, while the majority of the company is owned by the management, which even after the IPO will own more than 80 percent of the stock.

At the heart of Free's success is its local loop unbundling strategy, its technology, and its range of services. It currently has its DSLAMs in more than 160 France Telecom digital local exchanges. There are 550 digital exchanges in total in France, 500 of which are available for unbundling.

Free says more than 160,000 of its customers, about one third, are on its unbundled local loop. It aims to have half of its subscribers on unbundled lines by the end of 2004 and increase this again to two thirds by the end of 2005, when it hopes to have 1 million customers in total.

The service provider also runs its own 7,000-kilometer national fiber network to connect its points of presence (POPs) and to connect each POP to France Telecom's exchanges. Most of the network is dark fiber from wholesale carrier LDcom Group, supplemented by a small amount from local sources and some of its own fiber. To date, Free's network is connected to about 280 local exchanges.

Free's approach is to launch service market-by-market by reselling France Telecom's service, then installing its own DSLAM once it reaches a certain number of subscribers. Unbundling gives Free more control of the services it can offer, makes it cheaper and easier to offer higher bandwidth to customers, and reduces interconnect costs. Cash raised from the IPO will be used to further extend the network, build more POPs, and even fund some acquisitions, according to a Free spokeswoman.

As for its technology, the company is keeping the details under wraps. It has developed its own DSLAM and set-top box but won't say if it has any partners or whether it couldn't source the systems it needs for its service combo.

The fact that Free decided to develop its own systems to deliver TV and VOIP over broadband is another sign of the current immaturity of the available technology in this market (see Euro Telcos Flirt With TV ). Graham Beniston, Heavy Reading's analyst at large and principal of Beniston Broadband Consulting, says he can understand Free developing its own set-top boxes. "The customer premises end is ripe for service differentiation," says Beniston.

But he can't understand why the company would develop its own DSLAM. "That's a bit strange. The equipment from companies such as Fujitsu Ltd. (OTC: FJTSY), Lucent Technologies Inc. (NYSE: LU), and Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) are more than adequate for triple-play services." Beniston evaluated the latest DSL systems for a Heavy Reading report, Next-Generation DSL Equipment: The Path to Profitability.

Elsewhere, though, Free is sourcing infrastructure from known vendors, including switches from Cirpack to manage its voice traffic (see Free Chooses Cirpack for Voice).

Industry analysts believe service providers must offer value-added services across their DSL connections as broadband becomes more pervasive and the margins for simple high-speed access services shrink (see DSL Growth Explodes in 2003). Free launched its VOIP service in August 2003 and says a "very large majority" of subscribers use the service, though it wouldn't be any more specific. Its TV-over-DSL service was launched in late November, and by mid-December nearly 60,000 subscribers were watching TV through the Free set-top box.

The strategy has real potential, according to telecom analysts at J.P. Morgan Chase & Co.. They believe Free and Telecom Italia are each adding more than 6,000 new subscribers every week, and could put a dent in France Telecom's broadband targets. In particular, they identify the Italian player as Europe's "most capable fixed operator" with the experience and finances to take a significant portion of the French broadband services market. Telecom Italia is also making inroads in the German broadband market (see Italians Invade Germany).

Iliad is expecting to report 2003 revenues of between €290 million and €296 million, up from about €160 million in 2002.

— Ray Le Maistre, International Editor, Boardwatch

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