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Neos Acquired by Power Utility

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News Analysis
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4/2/2003
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U.K. Ethernet service provider Neosnetworks (Neos) was snapped up today by British power company Scottish and Southern Energy plc (London: SSE) for £13.4 million (US$21 million) in cash (see SSE Acquires Neos for £13.4M).

The utility company, which was a reseller of Neos services, says this will give it combined telecom annual revenues of more than £50 million ($78.5 million). This represents a very small portion of its overall business -- it posted 2002 revenues of about £4 billion ($6.3 billion).

The electricity supplier will add the Neos assets to its existing telecom subsidiary SSE Telecommunications (SSET), which already has 2,300 kilometers of fiber laid alongside its 121,000 km of overhead and underground power cables. It markets dark fiber, DWDM channels, and managed IP and MPLS VPN services.

Neos brings with it 100 points of presence throughout the U.K., including all the major business districts; about 350 customers; and 85 staff. It operates a Layer 2 MPLS Ethernet network, offering national and metro Gigabit Ethernet services across a 4,500km infrastructure that is partly owned but mostly leased (see Neos Intros Ethernet Over Copper and Neos Launches Ethernet VPNs). The services include its funkily-named "Liquid Bandwidth" offering (bandwidth on demand) that helped CEO John Wheeler onto our Top 10 Service Provider Innovators – Europe).

"This is a logical step and a good deal for us. We had been approached by two or three other potential buyers," says Neos marketing director Neil Fairbrother, who declined to name those other interested parties.

"This deal gives us financial stability," adds Fairbrother. "Those who may have liked our technology and services but were wary of a private company's financial structure can forget those worries now. We are looking for some very big projects."

Neos had revenues of about £17 million ($26.6 million) in 2002 and has no debt, according to Fairbrother. That revenue figure, however, falls way below the company's expectations of £30 million (see Neos Restructures Finances).

This might explain why Neos's existing investors -- 3i Group plc, Young Associates Ltd., Dolphin Equity Partners LP, and GATX Telecom Investors II LLC -- decided to cash in their chips. Among them, they had invested a total of about £65 million ($102 million at today's exchange rate) since the company's inception in 1997, according to Fairbrother. In other words, Neos's purchase price of £13.4 million is only about 20 percent of what they jointly put into the company.

All the same, Jan Dawson, senior analyst at Ovum Ltd. says Neos's price reflects a fair valuation. "Neos is by all accounts a very decent company and had received recent additional backing from its investors, but it is in a niche market." (See Neos Reports Record Q4). The combined annual revenues of Neos and SSET is about 0.4 percent of the U.K.'s total fixed telecom revenues in 2002, adds Dawson, but while the Ethernet services market is very small, "it does look to be a potential growth area."

Dawson sees further consolidation as inevitable in the U.K. market. "There are still way too many active fixed operators for them all to survive. They need economies of scale to survive in the networks business, and many of them will be acquired or go out of business because they're too small to survive on their own. That's what has driven this deal. We will end up with a small number of large players and a couple of niche service providers."

— Ray Le Maistre, Editor, Boardwatch

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