Wednesday, 13 August 2008

Netstore, 2e2 and the Application Outsourcing opportuinity

Yesterday Netstore announced its long awaited agreed bid from 2e2. Long awaited because news that Netstore was in bid talks date back to Feb 08. The bid is at 32p valuing Netstore at £58m. (You can read the full announcement and more detailed background on Netstore here) In its latest interims to 30th Dec 07, Netstore made a net loss of £266,000 on revenues of £19.6m

I have an interest in Netstore which I must declare - as an adviser to and investor in the Elderstreet Capital Partners, which took a position in Netstore pre its IPO in Apr 2000, I am a Netstore shareholder (albeit indirectly) . If you remember Netstore was founded in 1995 and could claim to have pioneered the ASP concept in the UK. Maybe that was the problem! I well remember myself 'pioneering' the ASP concept back in 1995 only finding that I had to eat my words as it took far longer to take off than I had ever imagined. Like a decade longer!

The Netstore IPO in 2000 was at c130p and the price soon rose to nearly 200p. So, as you can see, Netstore has suffered rather badly since. A new CEO was appointed in 2007 which resulted in a profits warning soon after. Things got worse when, earlier this year, Netstore announced some accounting irregularities which all created an environment where a sale became the preferred route for shareholders.

Conversely, CEO Terry Burt's 2e2 is picking up a well-positioned business which meshes well with its existing operations. Indeed, this boosts 2e2's revenues from c£240m to c£280m, which would put the Duke Street Capital-backed private company up to the kind of scale required for an IPO of its own. (I note that, in George O'Connor's note this morning, CFO Simon Burt says that "2e2 has no plans to test the public market at the moment".) You may remember that 2e2 most recent acquisition was Compel in Mar 07 for c£58m.

Personally I believe that Application Outsourcing will be a big future opportunity as SME's finally embrace the SaaS model. The combination of the various existing strands to 2e2's business with the ASP capabilities of Netstore, looks pretty powerful to me!

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