Tiscali faces up to the end of an Italian empire

It owes €250m and its dream of ruling Europe is dead. Giovanni Paci in Milan asks if the ISP can survive

With the Mediterranean summer holiday season still at its peak and tourists crowding the beaches of his native Sardinia, the sun abruptly set on Renato Soru's dream to make Tiscali one of the top three internet service providers in every country in Europe. Burdened with debt after years of expansion, mainly through all-paper takeovers, Tiscali sold no less than four subsidiaries last month, walking out of Austria, Norway and Sweden, and leaving South Africa too.

With the Mediterranean summer holiday season still at its peak and tourists crowding the beaches of his native Sardinia, the sun abruptly set on Renato Soru's dream to make Tiscali one of the top three internet service providers in every country in Europe. Burdened with debt after years of expansion, mainly through all-paper takeovers, Tiscali sold no less than four subsidiaries last month, walking out of Austria, Norway and Sweden, and leaving South Africa too.

As the company needs cash to repay a €250m (£170m) bond due next July, other sales are expected soon, for the reality is that Tiscali has lost the financial markets' trust. On 5 August, in an effort to prove the doubters wrong, Tiscali announced an asset disposal plan of up to €250m. At the same time, it said it would concentrate on "at least" the five core markets from which four-fifths of the group's revenues are currently derived: the UK (24 per cent), France (20 per cent), Italy (18 per cent), the Netherlands (10 per cent) and Germany (8 per cent).

After the August sale, which netted €72m, Tiscali's subsidiaries in Switzerland, Denmark, Spain and the Czech Republic are next in line for disposal, along with TI Net, the company that owns the group's international cable backbone. But even a sellout as wide-ranging as this one might not be enough to achieve the €250m target, according to financial analysts. It comes as no surprise, therefore, that investors have turned away and that Tiscali's shares have lost over half of their value in the past six months.

The market is also worried because the group is going through the toughest chapter in its history without the active support of its founder. A few months ago, Mr Soru, who is still Tiscali's non-executive chairman and a 28.9 per cent shareholder, gave up the chief executive's job to follow his new love: politics. Observers noted how, thanks to the timing of his June election to the post of governor of Sardinia, he was able to avoid going down in history as the man who dismantled the Tiscali empire. This is instead the task of the Dutchman Ruud Huisman, who took over as the group chief executive in May.

Formerly the chief of Tiscali's Dutch and Scandinavian operations, Mr Huisman has reviewed the group's business plans in the past few months, with the aim of reshaping Tiscali and achieving profitable growth. But he must also find that badly needed €250m, while keeping annual investment at around €130m and maintaining a promise to turn the group into a free-cash generating entity during the last quarter of this year.

At the end of June, shareholders gave the board an additional tool in the form of a share issue reserved for institutional investors, which would have meant a capital increase of up to 10 per cent. But since then the share price has collapsed, and the issue is now highly unlikely to happen. Last month, second-quarter results so disappointed investors that shares sank to €2.225, their all-time low. After years of heavy losses and cash burn quarter after quarter, analysts want to see that Tiscali really can turn cash positive this year and make its first profit before exceptionals in 2005.

Despite the financial difficulties, analysts reckon the group is doing well on the business side, with 200,000 new broadband subscribers in the second quarter and plans to sign another 360,000 in the second half of the year. As of 30 June, Tiscali had 7.9 million active users, of whom 1.44 million are broadband subscribers. Some 400,000 of those are in the UK.

Tiscali is now investing in the introduction of the Local Loop Unbundling (LLU) mode, under which the operator uses its own equipment at the incumbent's exchange (the incumbent being BT in the UK). LLU is central to Tiscali's strategy of offering its subscribers the so-called "triple play": internet access, voiceover internet protocol (ie, internet phone calls) and media services. In terms of margins, if dial-up stands at around 15 per cent and normal broadband at 50 per cent, LLU achieves 70 to 80 per cent. Already rolled out in the Netherlands, LLU is now being developed in Italy and France and should hit the UK next year.

Tiscali's interim results were not really what the market had expected. In the six months to 30 June, revenues went up by 26 per cent to €540m, but gross margin slipped to 46 per cent of revenue. The bottom-line loss totalled €117.6m while the company burnt €28.9m of cash. The market is cynical about Tiscali's chances of turning cash positive this year, though sources at the group's Milan headquarters are so confident they will prove the doubters wrong that they are predicting positive cash figures as soon as next month. This forecast is based on the fact that out of the five core markets, three - the UK, the Netherlands and Germany - already generate free cash, while Italy and France are expected to get there in a few weeks' time.

Mr Huisman's hope is that once Tiscali proves it has really put an end to the cash bleeding, market sentiment will change. This could give him the chance to make full use of all the financial tools at his disposal, in which case the €250m bond would be repaid through a mix of the asset disposals, the issue of a new convertible bond and even - if the stock value picks up again - the share issue.

On the other hand, with a market capitalisation of around €865m, Tiscali could well become the target of takeover bids. Not long ago T-Mobile dismissed rumours of its alleged interest in the group, saying that it was too expensive. But since then, Tiscali's market value has halved.

The global dream is already over for Tiscali. Its founder has quit. Could its independence be the next thing to go?