Auction stations

Jim Rose's British online auction house QXL is under pressure from rival American giant eBay. The UK company's valuation has plummeted from £2.9bn to £200m. Rose has salvaged his deal with Germany's ricardo, but is it big enough to survive on its own?
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The Independent Online

Jim Rose is running a little late and his haste is making him speak faster than usual. The energetic chief executive of QXL.com, the online auction house, has been delayed on his way back to his office in Hammersmith, west London, and he is running to catch up. For Mr Rose this involves launching into verbal overdrive at a zillion words a minute.

Jim Rose is running a little late and his haste is making him speak faster than usual. The energetic chief executive of QXL.com, the online auction house, has been delayed on his way back to his office in Hammersmith, west London, and he is running to catch up. For Mr Rose this involves launching into verbal overdrive at a zillion words a minute.

"OK. I wasn't sure if this meeting was on or not and it took a while to get here. I'm good for an hour. I've got to go to Canary Wharf later to see our bankers. Can I pick up the Jubilee Line from Green Park? It'd take an age by taxi. Would you like some water? I'll get it." Phew.

Mr Rose is hardly your typical, run-of-the-mill chief executive of a publicly quoted company. First, he's an American, hailing from Chicago and with an MBA from the Windy City's Kellogg School of Management. At 39 he is an internet greybeard. "I am one of the oldest here," he says.

It is easy to understand why Mr Rose is so ebullient. He has just returned from a few days' holiday in Madeira where he negotiated better terms for QXL's £171m all-share takeover of ricardo.de, its German rival.

The deal to cement QXL's position as Europe's leading online auction house had threatened to implode earlier this month, after ricardo's trading nosedived in the three months since the deal was announced in May, valuing ricardo at £627m. As shares in both companies plummeted, City analysts questioned QXL's future in a rapidly consolidating European market, also targeted by eBay, the huge American online auctioneer, with increasing aggression.

eBay first developed the concept of online auctions in which sellers post details of anything from second-hand cameras to unwanted Beanie Babies and watch other internet enthusiasts bid for them online. QXL launched three years ago, with the backing of a catchy advertising slogan slogan, "Don't buy or sell it until you QXL it", and found its service similarly addictive to bargain-hunters.

It works like this. If a seller wants to sell a Pentax camera they register on QXL's website and type in the details in the manner of a classified advert in a newspaper. They can also scan in a photo. The seller sets a reserve price below which they will not sell and a date by which the auction will close. The seller then sits back and waits for the bids.

When the bidding is over, QXL e-mails buyer and seller with their respective e-mail addresses to enable them to arrange the handover of goods. QXL makes its money from charging a commission on successful sales. From next month it will introduce a small charge for putting items up for sale.

The site has proved hugely popular, attracting more than a million registered users and 7.4m items for sale in the three months to June. Indeed, when QXL took down its site for an hour over the New Year to protect it from the millennium bug, more than 100,000 netheads tried to log on between 11.45pm and 12.45am. "Pathetic, isn't it," says Mr Rose.

But the storm clouds are gathering. With eBay operating sites in the UK and Germany, the fear in the City is that QXL will find itself drummed out of Europe by the Big Daddy of the sector. Peter Misek, internet analyst at Chase H&Q, feels the outlook is bleak. "The merger with ricardo is positive, broadly speaking. But they missed our forecasts on sales, net operating losses and gross auction value. In fact, they missed just about everything apart from its subscriber numbers."

Mr Misek has a share-price target of 40p for QXL, at which point he claims the company will become a bid target. But who would buy it? The obvious predator is eBay, but Mr Misek is not so surethe US company would bother. "They [eBay] are killing ricardo in Germany and starting to beat up QXL in the UK. Why should they buy it?"

Geoff Ruddell, internet retail analyst at Deutsche Bank, agrees QXL may fall to a bid. "I think there is a very strong chance," he says. "The main issue is that at its current burn rate QXL will run out of cash in the second half of next year. They will find it difficult to come back to the markets if they stay as they are. That means management will have to look at other options."

QXL has £61m of cash but is "burning" through it at a rate of around £15m per quarter. With most analysts not expecting the company to break even until 2003, that would mean seeking fresh funds. Mr Rose has spent the last few months battling against City scepticism and he is painfully aware of the eBay threat. Having expanded QXL into 12 European countries in just a couple of years, he knows achieving scale quickly is the only way to make the economics work which leads to a straight European showdown with his US rival.

"These type of businesses are natural monopolies," he says. "They are like stock exchanges where the markets exist only if there is sufficient liquidity [the number of buyers and sellers]. There may be room for two players in Europe. No way is there room for three." There were reports that the two held tentative talks a month ago but, apparently, eBay was deterred by QXL's multiple technology platforms. "It could happen," Mr Rose admits. "I wouldn't mind as long as it was good for shareholders." There have also been approaches from retail groups, and others.

He talks openly about possible merger partners. "Other people are very attractive, like the portals [such as Freeserve and Yahoo!]. Then there are new media players such as NTL [Britain's biggest cable operator] and News Corporation. We are a natural for News Corp." He says many old economy companies should have looked at online auctions but they have missed the boat. "If you think about it, we're classified advertising and direct mail. Great Universal Stores should have been in this business. But there are lots of angles from which this kind of internet trade works. Online auctions are the stickiest kind of content there is. You can deliver exciting content to a range of platforms. The whole thing could open up. But in this market, who knows?"

Mr Rose does know QXL is in a battle royal with eBay and some of the figures do not make happy reading. MMXI Europe, the internet research agency, reckons QXL ranks only fourth in Germany with 199,000 unique visitors in June, compared to eBay's 786,000. QXL is still the market leader in the UK with 440,000 visitors, but eBay is catching up. The American giant also has the advantage of being profitable. It recorded profits of $10.8m last year compared to QXL's losses of £77.5m, the figures hit by heavy sales and marketing costs.

In QXL's first-quarter figures, reported earlier this month, they registered losses of £15m though the number of registered users was up by 88 per cent on the previous quarter at 1.3m, and the gross auction value was also up by more than 80 per cent to £18.4m. "Show me another company with numbers like that," says Mr Rose. "This business is smokin'."

But the City is not so sure. The dot.com fallout, combined with the uncertainty over the ricardo deal, has hammered QXL's share price from a high of 744.5p in March to just 51.75p now, below the adjusted 68.3p issue price when the company came to the market last October. The battle against eBay, with its market value of $15.5bn against QXL, which is valued at £203m, is looking increasingly unequal.

QXL was founded in 1997 by Tim Jackson, a former financial journalist on The Independent, who was then working on the Financial Times. The original name was Quixell, a shorthand for Quicksell, and the inspiration came from eBay.

Mr Jackson, who had also written books on Sir Richard Branson, has seen the US auction sites and wanted to set up something similar here. Early funding of £500,000 came from the Israeli venture capital firm Jerusalem Global but the operation was still a shoestring organisation. When the site launched, QXL staff were told to put their flats up on the site to boost interest.

In February 1999 the group raised $12m from the City, the bulk coming from Apax Partners, a UK venture capital firm with a strong track record in high-tech investments. At that point, things started to get serious. Jonathan Bulkeley was recruited as chairman from the internet operations of Barnes & Noble, the US bookseller. Jim Rose was headhunted from United News & Media, the Express newspaper group, where he headed its information group.

"Things have changed a bit since then," says Mr Rose. "We used to be in an old dumpy warehouse in Notting Hill. We'd hold meetings out by the Dumpsters and the technology was so poor the e-mails would keep crashing."

As QXL grew, Tim Jackson stepped back to a non-executive role and is now only peripherally involved. "I wondered at the time whether the founder could really walk away but it wasn't a problem," Mr Rose says. "He still sends me e-mails."

QXL had already started expanding in Europe with sites in Germany and France but with Apax's backing it pressed ahead quickly. Having raised a further £20m in June 1999, it launched in Italy the same month then pressed the button on a stock market flotation.

Though the float valued QXL at only £250m, it gave the two-year-old company a highly valuable cash pile. As QXL shares soared on the back of the internet boom, it used its valuable paper to acquire a series of companies such as Bidlet, Sweden's leading auction site for £347m.

Even as late as this April there was another surge in QXL's share price when a US analyst at SG Cowan said that the shares were worth double if eBay was used as a guide.

Now, analysts are uncertain about QXL's future, with many seeing an alliance or merger as inevitable. As Peter Misek at Chase H&Q says: "It's make-or-break time for them. The next two or three months are going to be crucial."

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