Caudwell Sells to Pipex

PIPEX Communications plc, the broadband, hosting and telecoms network operator, has announced the acquisition of Caudwell Communications Limited, trading as Homecall, for an undisclosed sum, including the assumption of bank debt of approximately £43 million, which has now been repaid by PIPEX.

Homecall is one of the UK’s leading providers of voice, line rental, and broadband services. Homecall currently has over 500,000 customers of which in excess of 350,000 take more than one service.

The last set of audited results for the year ended 31 December 2004, showed turnover of £91.4 million and a loss before tax of £34.7 million. The losses were principally incurred by a significant and successful customer acquisition programme. Homecall is now trading profitably at the profit before tax level.

Currently, the acquisition is anticipated to improve PIPEX’s EBITDA by approximately £2 million in 2006 and approximately £5 million in 2007. It is not expected to have a significant impact on current capex forecasts for 2006 and 2007 and is expected to improve free cash flow after interest for 2007 by approximately £4 million. There will be additional synergies which may provide further upside.

PIPEX’s stated strategy has been to develop an integrated portfolio of voice and broadband services. The company says the acquisition fits well with this strategy, with over 350,000 Homecall customers buying more than one service. The value of this strategy is demonstrated by increased average revenue per customer and a considerable improvement in customer retention. Where a customer purchases carrier pre-select, wholesale line rental and broadband services the average customer life-cycle is extended by 44 months beyond that of a single-service voice subscriber.
In addition, there are a number of further benefits:

• The acquisition brings with it complementary sales channels to PIPEX’s web based approach: a high street distribution presence selling through the Phones4u retail chain of 363 outlets and a large outbound telesales team;

• The acquisition should provide significant cross-selling opportunities for Homecall’s voice products and PIPEX’s broadband and hosting services. As a combined entity, the Group will now have over 29% of its broadband base buying other services, up from 2% a year ago;

• The acquisition increases the density of customers around a number of exchanges which PIPEX is currently unbundling, and is expected to both improve margins and enhance the payback period on the investment made in unbundling these exchanges;

• The acquisition adds significant scale, increasing the total PIPEX customer base to over 1 million customers across broadband, CPS, WLR and hosting.

Chairman of PIPEX, Peter Dubens, commented: “This acquisition brings with it four very important elements: additional scale, high street and call centre sales channels, accelerated returns on our LLU strategy and significant cross-selling opportunities.

“In terms of scale, we will now have over 1 million customers in the UK across broadband, voice and hosting, further consolidating our position as a major player in the broadband market. PIPEX traditionally sells over the internet and the acquisition brings significant call centre sales expertise and importantly access to high-street footfall through a distribution agreement with Phones4u. We can use these distribution channels not only to drive new business but also cross-sell our hosting and broadband services, a model that should generate financial benefits as well as significantly increase customer retention. As a result, we expect the financial effects to be immediately beneficial to PIPEX’s shareholders.

“Finally, PIPEX is a growth company and there should be significant opportunities for the management and employees of Caudwell to drive the combined business forward. We look forward to working with them.”

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