Esat did very well to buy Postgem/IOL for £115m

Following the sale of the Postgem/Ireland On-Line package to Esat, many were shocked by the price paid and the state of the goods received. The deal was declared an outlandish one. What company in its right mind would purchase, for a hefty £115 million (€146 million), a set of companies carrying more than £200,000 in debt?

The simple answer is, a smart company, and one carefully positioning itself to be a powerful player in an emerging set of markets.

First, the debt issue. Postgem, the data and network services provision end of the package, is a profitable enterprise, say several sources familiar with the operation (combined income of Postgem and IOL was stated to be £7.494 million for the first six months of this year). That leaves IOL as the likely source of debt, and very probably a source of continuing debt into the near future. But most Internet-oriented companies would welcome debts this small.

Ireland On-Line, the State's first commercial Internet service provider, has one of the best and most widely-known Internet brand names in the State. It has a significant subscriber base - 35,000 people, according to IOL - and is well-positioned to generate revenue from those users as the services-and-advertising income model takes over from the thin-margin subscriptions model. Its level of debt is consistent with an Internet enterprise and in terms of the value of its subscriber base, variously estimated in the Net industry as between $400 (€384.50) and $1,000 per subscriber, it is actually very low.

From Esat's point of view, acquiring that subscriber base is an intelligent move, as the company clearly has intentions in the Internet market. To date, it has been at best a low-key, under-performing player - certainly, its Net offerings through Esat Clear failed to ignite the market.

But the company has been gearing up to change that. During the summer it redefined its Internet offerings, including offering a flat rate plan. It is understand that Esat will soon launch a comprehensive e-commerce package for businesses as well, providing website design and management through a third party, and online credit-card payment services through one of the Irish banks.

Esat Clear's subscription base is quite low, estimated by industry observers to be in the vicinity of 10,000-15,000. The addition of three times that amount of accounts will significantly strengthen Esat's Internet presence and create a viable audience for services and ad revenue as well.

Now, take IOL as the smaller part of the Postgem package and a £115 million asking price becomes ridiculously attractive. With Postgem, Esat acquires a mature, profitable data network and services company with its own frame relay network, e-mail and e-commerce offerings. Postgem has many highly-desirable customers, including Microsoft, AIB and Irish Life and Permanent. It handles the Irish end of Infonet, an international data network for Europe. The foundation of its network is Postnet, the network it set up to service An Post's 600 offices around the country, but Postgem quickly realised it could sell slices of the network to other customers as well. Postgem is, according to an informed source, a "massive spender" in terms of telecommunications infrastructure, believed to be in the order of £4£5 million a year for lines it had until now purchased through Eircom; another few million goes on buying international bandwidth. Presumably Esat will migrate the customers using those lines, and Postgem's own network, onto its own networks, insofar as is possible. Esat will undoubtedly also hope to handle the networks for An Post.

So, if one looks at the deal only in its most basic terms - the customers, data-service offerings and new telecommunications income from Postgem - Esat has every reason to feel pleased with itself. But if one looks at the new position Esat gains within the Internet market, and the vast potential for eventually offering a range of broadband (high-speed data network) services to Postgem customers like Microsoft and AIB, Esat has done very, very well indeed. Karlin Lillington is at klillington@irish-times.ie.