M-Web CEO Kim Reid says he is comfortable with the R320 million price tag attached to Tiscali`s South African operations, as it is a profitable business with a model that closely matches M-Web`s.
Tiscali`s Italian head office announced the deal late last week, stating that M-Web would pay 40 million euros for the South African company`s 100 000 subscribers. However, the deal excludes the cellular offerings, which will be sold separately with an asking price of five million euros (R40 million).
The deal will add to M-Web`s own subscriber base of about 248 000 and will be settled in cash once the Competition Commission has given its final approval - a process that takes about 60 working days.
"Unlike the past, we are not paying a rate per subscriber. We are buying a profitable business that has a real valuation," Reid says.
He says Tiscali SA is a composite business and M-Web had closely examined how it would perform in a merged environment.
It was speculated that Telkom was the main rival bidder and was prepared to pay about R400 million for Tiscali SA. However, competition considerations, which included potential action by the Internet Service Providers Association (ISPA), effectively precluded Telkom from the deal.
Reid says he is confident the Competition Commission will approve the deal as the nature of the Internet market shows there are no real dominant players. "We see there being a total of 2.4 million Internet subscribers, which includes those who access it from local area networks, large organisations and dial-up access," he says.
He also acknowledges that the dial-up Internet market is close to stagnation and that real growth for the larger players will come from acquisitions.
Stagnant dial-up market
Arthur Goldstuck, head of Internet research company World Wide Worx, says the dial-up market is expected to grow slowly this year from about 1.038 million subscribers to about 1.1 million subscribers.
Goldstuck says the deal makes sense in that M-Web and Tiscali have similar business models and so it would be easier for M-Web to absorb Tiscali than for Telkom to do so.
"Telkom operates a lower economic model Internet service and so to absorb a premium rate service would be difficult," he says.
Goldstruck defines the lower rate model as being subscribers who pay up to R80 per month, while the premium rate model means they probably pay about R145 per month.
ISPA head of regulatory issues Ant Brooks says it was preferable from a market point of view that M-Web, rather than Telkom, buys Tiscali.
"Telkom would have become too much of a strong player. However, it is good that the deal is still subject to Competition Commission approval because M-Web has taken a dominant position," he says.
Storm MD Tim Parsonson says the deal makes sense for M-Web as it wishes to protect its premium rate business, but that many subscribers who have now passed the learning curve are looking for low prices and speed of service.
"But the good thing about this deal is that I can`t see M-Web dominating the market in the same manner as Telkom would if it had bought Tiscali," he says.
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