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Tiscali chief seeks financial respectability

Tommaso Pompei is seeking to give long-sought financial respectability to Tiscali, the European internet service provider.
/ Source: Financial Times

Tommaso Pompei is seeking to give long-sought financial respectability to Tiscali, the European internet service provider.

In an interview with the Financial Times, the chief executive expresses confidence that Tiscali will for the first time report a net profit in 2008.

That profit is only due to be about €20m ($29m). But if Mr Pompei is right with his forecast, it will be an important milestone for the company - and increase the likelihood of it being bought.

Tiscali reported a net loss of €137m in 2006, compared with €13m in 2005, and the deterioration was partly because of writedowns in the value of its assets. The most recent results, for the nine months to September 30, recorded a net loss of €3.8m.

"We do believe that this year we have to prove to the market that we can deliver the results we have anticipated... By doing this... I believe the market will recognise the value of our group. And let's see what happens at that point," says Mr Pompei, who was chief executive of Wind, Italy's third largest mobile operator.

Tiscali was founded by 1998 by Renato Soru, an entrepreneur from Sardinia, as a fixed-line telephone operator. The following year Tiscali became an ISP provider and, after listing on the Milan stock exchange, it embarked on an acquisition binge that gave it a presence in 15 European countries and South Africa.

But those businesses never enabled the group to generate a net profit, and Tiscali began to sell them off in 2004.

Since becoming chief executive in 2005, Mr Pompei has disposed of businesses in the Czech Republic, Germany and the Netherlands, and staked the company's future on its operations in the UK, and, to a lesser extent, Italy.

Scale is the name of the game in providing high-speed internet access, because intense competition has made profit margins wafer-thin, and Tiscali last year bought Pipex, a UK broadband supplier with 570,000 customers.

That deal helped ramp up Tiscali's net debt to €597m at September 30, and the company is in the midst of a refinancing. This includes a €150m rights issue, and a €60m investment by Management & Capitali, a private equity fund founded by Carlo di Benedetti, former chief executive of Olivetti, the computer maker turned mobile operator.

Mr Pompei says Tiscali's net debt should be less than two times earnings before interest, tax, depreciation and amortisation (ebitda) in 2008, which would bring it into line with many peers.

That statement hinges in no small part on Tiscali's UK operations, which are supposed to generate 69 per cent of the company's revenue in 2008 and 76 per cent of its ebitda.

With the acquisition of Pipex, Tiscali has 1.9m broadband customers, giving it a 12 per cent market share, according to Enders Analysis, the consulting and research firm.

Tiscali has become the fourth largest UK broadband provider, and is one of the cheapest.

However, Enders estimates that Tiscali signed up just 10,000 new broadband customers in the third quarter of 2007, making that three months its worst subscriber recruitment period to date.

Mary Turner, chief executive of Tiscali's UK operations, says the company was not focused on subscriber recruitment in 2007.

Instead, it was busy integrating Video Networks, a UK company specialising in supplying television over fixed-line broadband rather than through an aerial.

Tiscali bought Video Networks in 2006, after the company decided to expand into "triple-play" services by supplying TV as well as fixed-line phone and broadband.

One of Ms Turner's biggest challenges will be persuading Tiscali's broadband customers to buy its fledgling television service.

Tiscali TV, which is based on Video Networks, currently has 50,000 customers, and Ms Turner wants 520,000 by 2012.

Tiscali is following a similar strategy in Italy, and launched a television service in Cagliari, Milan and Rome last month.

The group is Italy's fourth largest broadband provider, but with 520,000 customers, it has only a 5 per cent market share.

Tiscali has made a virtue of its independence over its 10-year existence, but Mr Pompei signals that he is prepared to sacrifice that. "It depends on the price," he says.