Outlook: What to do with Sir Stanley's Net gem

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The Independent Online
SIR STANLEY KALMS and his chief executive at Dixons, John Clare, claim always to have anticipated that their pioneering new service in Internet access provision, Freeserve, would take the UK market by storm. However, neither of them could have foreseen the effect on their share price, which has more than doubled since the service was launched last September.

Perhaps inevitably, they are now seeking to capitalise on their success by exploring the possibility of floating off a minority in an initial public offering. According to Dixons, the thinking behind this is nothing to do with value recognition - the value is already apparent in the soaraway share price. Rather it is about giving Freeserve the currency with which to make acquisitions in the highly valued Internet sector. And it is about the fact that investors expect and look for different things out of a retailer and an Internet service provider.

Dixons is expected to produce quite substantial short-term returns on capital in a way that is impossible for a fledgling Internet company. By the same token, if Freeserve is to fulfil its potential, it needs to be able to use cash and paper in a way that would be seen as wholly inappropriate for Dixons the retailer.

If all this is true, however, the logical approach would surely be to demerge Freeserve in its entirety, leaving investors in Dixons a share in each. What's the point in Dixons continuing to have control of its unexpected success if the two are completely different businesses? One reason, Dixons says, is that Freeserve has given the group's traditional business as an electricals retailer a quite considerable boost, through Internet sales and advertising, though it is unclear about how much.

But surely the real reason is an entirely uncommercial one, understandable though it might be; managements cannot bear to give up the things they have created, even when it might make sense to do so. When, moreover, the value bestowed by Freeserve, guarantees indefinite FTSE 100 membership - long a precarious thing for Dixons - the choice is more difficult still.

So how much is Freeserve worth? Analysts vary widely but few would put it at less than pounds 1bn. AOL, the highflying US Internet service provider, is valued at approximately pounds 5,500 per customer. Even allowing for the less sophisticated nature of the Freeserve service, the fact that none of its subscribers pay, and the exclusively UK nature of the subscriber base, some analysts reckon it may be reasonable to put a value of pounds 1,500 on each Freeserve customer.

With a million customers, possibly rising to three million after three years, that would give a potential valuation of more than pounds 4bn. Sounds crazy, doesn't it, but valuations like this are common place in the US. Whether UK investors are prepared to bite on such a choker is altogether less certain. The demerger route, allowing the stock to find its own level, would clearly be the better one, but it would surely be expecting too much to ask S

ir Stanley to give up such a gem.