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Optical/IP

THUS: Still Shopping

Releasing its financial results for the first half of the fiscal year, (London: THUS) said today that it's still trolling around for a takeover target to boost its scale in the U.K. service provider market. (See THUS Reports H1.)

Engaging in some dramatic cost-cutting, the alternative operator reined in operating losses by 75 percent to £5.8 million (US$9.96 million), with revenues up 5 percent to £174.5 million ($299.79 million). That kept its share price rising throughout the day, closing up 8.62 percent to 15.75 pence ($0.27) on the London Stock Exchange.

THUS said new corporate customer contracts, in addition to a 44 percent increase in broadband customers, compensated for decline in legacy areas such as dialup Internet access and carrier pre-select services.

Broadband revenues from its Demon ISP increased 24 percent to £17.4 million ($29.89 million), with the number of subscribers climbing from 70,000 to more than 100,000. Looking ahead, THUS expects to report its first-ever operating profit at some point during the second half of the year, but not for the period as a whole.

According to analysts at Investec, revenue was in line with expectations, but cashflow, at £700,000 ($1.2 million), was slightly behind. "Although market conditions are dire, 1H is more encouraging than expected."

In THUS's pre-close trading update in September, CEO William Allan said the company needs to roughly double in scale to return its cost of capital and is looking for a "sensible" acquisition to help it do that more quickly. (See THUS on the Prowl.)

That assessment still stands, as THUS confirmed today it still wants to go and buy something. "We confirm our intent to explore and capitalize on opportunities from industry consolidation," Allan said in a statement, although there's no word yet on what it fancies. The operator lost out on a last-minute bid for Energis plc (OTC: ENGSY) earlier this year, as Energis went with rival (NYSE: CWP) instead. (See C&W Wins Over Energis.)

Martin Mabbutt, an analyst at Man Securities Inc., notes, "THUS remains an interesting consolidation play but is going nowhere fast without some sort of deal," adding that it won't be able to reach its target of doubling the business without some kind of acquisition.

Observers have long said the über-competitive U.K. market desperately needs consolidation, and the "challenging" conditions THUS cites are an ongoing issue.

Aggressive pricing is one problem, as analyst Sam Morton of Dresdner Kleinwort Wasserstein wrote in a recent research note. THUS's first-half results were below expectations, but Morton says he is more concerned that the firm's promise of accelerated business during the second half won't materialize, given its comments that price pressure will continue throughout the year.

Analysts have suggested (London: KCOM) could be a good fit. Kingston confirmed earlier this month it's been approached by a potential buyer, reportedly The Carlyle Group, and is considering the bid. If the deal goes through, it's suggested Carlyle could then sell off the operator's corporate business to THUS. (See Kingston Confirms Takeover Talks.)

— Nicole Willing, Reporter, Light Reading

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