On January 29, Go plc announced that together with its majority shareholder Emirates International Telecommunications (Malta) Ltd (EITML), it agreed to buy a 21 per cent stake in ForthNet for €93.8 million, equivalent to €11.50 per share. The deal involves the transfer of the total number of shares held by Novator Equities Ltd (10.12 per cent) and Cycladic Catalyst Master Fund (5.73 per cent), and a 5.15 per cent stake held by Foundation of Research and Technology Hellas (Forth), to Forgendo.

Forgendo is a holding company registered in Cyprus and is equally-owned by Go and EITML. The latter is also acting as guarantor of the purchaser's obligations for the share purchase. In essence, Go acquired a 10.5 per cent holding in ForthNet. After the completion of the deal, which is subject to Greek regulatory approval, Forgendo will be the single largest shareholder with 21 per cent of the total issued share capital, followed by Aviva plc (7.69 per cent), Stichting Pensioenfonds ABP (7.12 per cent) and Forth who will retain 6.21 per cent of ForthNet. The balance of circa 58 per cent is held by private shareholders and members of the company's management.

ForthNet is a leading Greek internet service provider and an alternative fixed line and broadband operator. It was set up in 1995 by the Foundation of Research and Technology Hellas (Forth) and Minoan Lines SA and was listed on the Athens Stock Exchange in 2000. ForthNet is the single largest competitor to Greek incumbent OTE in the broadband market. In September 2007, ForthNet had a 22 per cent market share in broadband (189,267 subscribers) while the three other alternative network operators held 15 per cent of the market. The balance of 63 per cent was held by OTE. In the unbundled local loop (ULL) market, ForthNet's market share was of 42 per cent in September 2007.

ForthNet is due to announce its 2007 full-year results on February 27. During the first nine months of 2007, ForthNet's total income increased by 17.5 per cent to €86 million but it posted a negative EBITDA of €18.2 million due to subscriber acquisition costs of €15.2 million. As at September 30, 2007 ForthNet's assets amounted to €231.8 million with shareholders' funds of €128.7 million. Total debt amounted to €34.5 million compared to €49.1 million in cash resulting in net cash of €14.6 million. Moreover, ForthNet has an un-drawn credit facility of €150 million from the euro bond loan recently taken by the company.

Research obtained from foreign sources indicates that the justification behind a generally positive outlook on ForthNet are the following:

• Very low broadband penetration in Greece compared to the EU average: The Greek broadband market is the least developed internet market in Europe with a penetration rate of only 4.4 per cent in 2006 compared to an EU average of 14.9 per cent (the penetration in Malta was 12.9 per cent in 2006). In September 2006, the Greek government announced a €450 million programme to accelerate broadband penetration through investments in wireless hotspots, regional broadband networks, subsidies and other initiatives. This is estimated to increase broadband penetration to 34.5 per cent by 2015;

• Compelling competitive dynamics: ForthNet has a strong service offering compared to its alternative network competitors and with no cable infrastructure in Greece (thus eliminating risk of alternative technologies), ForthNet is able to take advantage of its strong brand name and its strong balance sheet. With over 20 per cent of the broadband market, the company ought to experience exponential growth should the penetration in Greece converge with the rest of Europe;

• Strong customer base: ForthNet is a leader in the business customer segment with over 1,500 customers including many of the large scale corporate customers. ForthNet is also the leading WiFi provider with over 170 WiFi hot spots through Greece;

• Improving regulatory environment: Due to the considerable disparities between Greek and European broadband penetration rates, there is increasing pressure on the Greek regulator to open up the market. This should also lead to an improved ULL framework allowing ForthNet to continue to add subscriber numbers;

• Favourable cost base contributing to increased margins: The increased margins result from a combination of low labour costs, falling broadband equipment prices, low line rental costs and the line density per exchange;

• Healthy ARPUs: ForthNet has one of the highest Average Revenue Per User (ARPU) in the EU on account of the high retail prices. The company's growing subscriber base is enabling it to increase the number of revenue streams also as a result of the bundling of services;

• Experienced management team: ForthNet boasts of a highly experienced management team considered to be among the internet pioneers in Greece.

This investment is not without its risks, the main ones being:

• Unlike its major competitor OTE, which owns a significant network of over 650 retail outlets, ForthNet does not own such a network (although recent press reports suggest that ForthNet is structuring an independent retail network to distribute its products) and currently has non-exclusive commercial agreements with various independent IT retailers. In order to continue to gain market share and loyalty, such a network becomes indispensable for promotion campaigns and after sales support;

• The lack of access to a mobile network (unlike OTE which owns Cosmote) may limit cross-selling opportunities at ForthNet and cost advantages.

Investors should not react negatively to the fact that Go and EITML conducted this acquisition at a premium of circa 20 per cent to ForthNet's market price on the Athens Stock Exchange. Unfortunately Maltese investors have over the years been led to believe that a transaction involving a sizeable shareholding in a company is normally done at a discount to the market price. The opposite is most often the case in international markets. One can mention various examples of such acquisitions. Only last week there was the announcement that Microsoft intends to purchase Yahoo Inc. for $44.5 billion (62 per cent above Yahoo's market price before the announcement). Overseas investment houses which follow ForthNet have a 12-month price target of between €13.60 and €15.40 per share, substantially above the price of €11.50 paid by Go and EITML. Although Go can easily finance this acquisition from its high level of cash which totaled €67.3 million as at June 30, 2007 (apart from the €10 million refund due to be received from the VAT Department), Go should seriously consider seeking bank financing to pay for this acquisition. Go has a very robust balance sheet with minimal borrowings compared to its share capital and accumulated profits of €202 million. The bank financing route will help the company to pursue a more generous dividend policy, thereby satisfying the minority shareholders' persistent calls for increased dividends.

• Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It contains public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC may have or have had a relationship with or may provide or has provided other services of a corporate nature to companies therein mentioned. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees, accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd
http://www.rfstockbrokers.com

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