Energis plc

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Energis plc

Carmelite
50 Victoria Embankment
London EC4Y ODE
United Kingdom
Telephone: +44 20 7206 5555
Fax: +44 20 7206 5500
Web site: http://www.energis.co.uk

Public Company
Incorporated: 1993
Employees: 3,500
Sales: $1.18 billion (2001)
Stock Exchanges: London NASDAQ
Ticker Symbol: EGS.L (London); ENGSY (NASDAQ)
NAIC: 513310 Wired Telecommunications Carriers; 513322 Cellular and Other Wireless Telecommunications; 514191 On-Line Information Services

Energis plc is a leading provider of telecommunications and e-commerce solutions to the business market in the United Kingdom. Since 1999, the company has embarked on an aggressive strategy to expand into Continental Europe, resulting in a significant presence in Germany, the Netherlands, Switzerland, Ireland, and Poland. In 2001, Energis launched the interactive portal BrightBlue, its first service aimed at consumers.

Rapid Expansion As a Telecommunications Service Provider: 1993–97

Energis plc was founded in March 1993 as a private company by National Grid Group, which was an electrical utility in the United Kingdom. At the time the company was conceived, it decided to focus on telecommunications, which represented a mature market for conventional voice services and a high growth market for enhanced voice and advanced data services. The company anticipated strong growth in corporate data networks, but it did not expect the spectacular growth that occurred during the rest of the decade in corporate internets and intranets, call centers, and the huge volume of data that companies would be transmitting to manage and run their businesses.

By mid-1994, most of Energis’s national telecommunications network had been constructed. The company decided to build the most modern network possible and based its fiberoptic network architecture exclusively on the Synchronous Digital Hierarchy (SDH) standard. It also saved considerable time and expense by building its network primarily across the National Grid Group’s electricity transmission infrastructure. Within 19 months of beginning construction of its network, Energis was able to bring its first services to market. Even before it completed its core network, Energis won its cornerstone contract with the BBC (British Broadcasting Company).

In December 1997, Energis became a public company, with shares trading on the London Stock Exchange and the NASDAQ. Net proceeds from the flotation were approximately £200 million. The company used the proceeds to reduce its debt to the National Grid; it also capitalized £190 million of inter-company loans from National Grid and issued £60 million worth of convertible preferred shares to the National Grid. By March 31, 1998, the end of Energis’s first fiscal year, the convertible preferred shares owned by the National Grid were worth £1.6 billion if fully converted.

Energis reported turnover, or revenue, of £167.9 million for its first fiscal year as a public company ending March 31, 1998. That compared to revenue of £97.1 million for 1996–97, £42.8 million for 1995–96, and £4.6 million for 1994–95. In 1997–98, basic telephony contributed £99.9 million, a 67 percent increase over the previous year, while revenue from advanced services increased by 82.4 percent to £68 million. Growth of basic telephony revenue was attributed to an increase in Energis’s customer base and connected customer sites as well as a focus on increasing sales through resellers and aggregators. Advanced services—a higher margin business than basic telephony—benefited from a deliberate sales and marketing focus and from working with existing customers to introduce valueadded services such as Energis’s Virtual Private Network service, CustomNet, and Frame Relay and ATM data services.

By the end of its first fiscal year as a public company, Energis’s national network stretched over 5,000 kilometers. It was built primarily across the National Grid’s electricity transmission infrastructure as well as along the main distribution lines of some regional electricity companies and through the London underground. Through a capacity sharing agreement with Scottish Telecom, Energis was able to serve customers in Scotland. The company secured an International Facilities license in December 1996 and owned capacity in 11 submarine cables. Energis also established correspondent relationships with major overseas telecommunications operators to deliver traffic abroad and to carry their traffic back to the United Kingdom.

Added Capacity and Services in the United Kingdom: 1998–99

Network expansion plans for 1998–99 called for extending the basic network an additional 1,450 kilometers and connecting the national network to Britain’s key metropolitan areas. That would enable Energis to connect directly with its customers’ sites, thereby reducing interconnect payments and increasing the speed and depth of its services.

In April 1998, Energis formed a joint venture called MetroHoldings Ltd. with Deutsche Telekom and France Telecom. MetroHoldings planned to invest £100 million over the next five years to expand its network across London and then into other metropolitan areas in the United Kingdom. In September 1998, the MetroHoldings network went live in London with the completion of three fiber-optic rings. That same month, MetroHoldings finished the second phase of its metropolitan area network program by concluding construction of networks for businesses in Birmingham and Manchester.

In 1998–99, Energis began to benefit even more from explosive growth in Internet and data communications. For its fiscal year ending March 31, 1999, the company’s revenue from advanced services—including data communications and Internet services—nearly tripled to £77.4 million. Overall, Energis reported revenue of £285.5 million for fiscal 1998–99, a 70 percent increase over the previous year. Although the company had yet to turn a profit, it managed to reduce its loss before taxes by 50 percent to £31.1 million, and its EBITDA (earnings before interest, taxes, depreciation, and amortization) was a positive £49.7 million. During the fiscal year, Energis’s national network added nearly 1,500 kilometers to reach more than 6,500 kilometers. With the National Grid reducing its holdings in Energis to 49 percent in terms of shares, the company was able to join the FTSE 100, Britain’s national stock index, in March 1999.

As part of its strategy to grow its advanced services business, Energis acquired Planet Online Ltd. for £75 million in August 1998. Established in Leeds in 1995, Planet Online was the largest independent Internet service provider (ISP) in the United Kingdom that was focused on the business market. Later in the year Energis and Planet Online supplied the network and connectivity for Freeserve, a free Internet service launched by Dixons Store Group, England’s largest electrical retailer.

Rapid Expansion in Continental Europe: 1999–2000

Fiscal 1999–2000 was a good year for Energis. The company reported a 73 percent increase in revenue to £494 million. EBITDA increased 86 percent to £92.3 million, and the firm’s operating loss before taxes and interest (EBIT) was reduced to £7.1 million.

In May 1999, Energis and Viridian Group plc, the parent company of Northern Ireland Electricity, formed a joint venture called nevada tele.com to build a new telecommunications network in Northern Ireland. Like Energis’s U.K. network, the Northern Ireland network was built with SDH broadband fiberoptic transmission technology. It was to be built over Northern Ireland Electricity’s infrastructure. Service in Belfast began in February 2000, with the rest of the country to follow.

In other U.K. developments, MetroHoldings Ltd. completed nine more metropolitan area networks to serve business communities in Birmingham, Manchester, Leeds, Bristol, and other cities. In November 1999, Energis acquired the U.K. company Datarange Communications from SFA Inc. of Maryland for £15 million. Founded in 1987, Datarange offered a complete range of network integration services, including design, consultancy, implementation, and support, which Energis could now offer to its business customers.

During fiscal 1999–2000, Energis expanded the services offered by its Internet division, Planet Online. In June 1999, Planet Online also began offering application service provider (ASP) services, starting with Windows Office 2000 and Exchange 2000. In November 1999, Energis acquired streaming audio and video technology for Planet Online by investing £15 million in Geo Interactive Media of Israel. Half of the investment went toward a 5.6 percent interest in the company, while the other half gave Energis the exclusive four-year European rights to Geo’s audio and video streaming technology. That enabled Planet Online to launch itself as a media Internet service provider in the United Kingdom and Europe. The technology also enhanced Planet Online’s web hosting and related services. In November 1999, Planet Online launched a new e-commerce platform that offered customers a customizable electronic storefront, backed by a full range of services from payment to product delivery. As part of Energis’s desire to move into the hosting of vertical and sectorspecific applications through Planet Online, Energis invested £7.5 million in online brokerage firm Broker-to-Broker Networks Inc. in January 2000.

Company Perspectives:

Energis is a communications company with a passion, helping business customers achieve their goals. This has moved our focus towards providing a comprehensive range of internet and advanced data services —supported by fast, reliable, broadband national networks. We are rapidly developing businesses in selected Continental European markets, building on our proven UK business model. Our aim is to be the leading e-business and advanced telecoms solutions provider in Europe.

With its core U.K. business doing well, Energis expanded into the Continental European market with confidence. During fiscal 1999–2000, the company invested £449 million in European-based acquisitions. Its first European acquisition came in August with the purchase of Netherlands-based, pan-European carrier Unisource Carrier Services for about £60 million. Unisource provided international wholesale voice services, managed bandwidth, and Internet transit services to alternative fixed line and wireless telecommunications operators in Europe as well as to Internet service providers (ISPs). The acquisition gave Energis a pan-European backbone network and points of presence in ten European countries and in the United States, as well as an existing customer base. Following the acquisition, Unisource was renamed Energis Carrier Services.

In November 1999, Energis acquired EnerTel for £352 million. Renamed Energis NV following the acquisition, EnerTel was the Netherlands largest fixed line network alternative to the country’s national telecommunications operator KPN. Energis made a similar acquisition in Germany in March 2000 when it purchased carrier24 for about £20 million. Carrier24 was a start-up company formed in May 1999 as an alternative network. At the time it was acquired by Energis, carrier24 was Germany’s third largest telecommunications network by reach and had licenses to operate in Austria, Luxembourg, and Switzerland. After obtaining a license to operate in Poland, Energis formed a consortium there with the National Grid and local Polish companies to provide long-distance telephone service.

Energis extended its Continental Europe strategy even further with the December 1999 acquisition of a controlling interest in German Internet service provider BusinessOnline. Established in 1994, BusinessOnline was headquartered in Berlin and had offices in four other German cities. It was a rapidly growing business with revenues of £1 million for the first ten months of 1999. The acquisition of BusinessOnline, together with services offered by Planet Online through Energis Carrier Services, gave Energis a stronger Internet and data services presence in Europe, while at the same time strengthening its direct sales channels and services across Europe. Energis also announced it was investing in the construction of six data centers in Europe, with data centers in Frankfurt and Amsterdam expected to be operational by the spring of 2000.

Improved Business Mix in 2000-01

During fiscal 2000-01, Energis improved its business mix in favor of higher margin advanced services, data communications, and IP-based products. For the year, sales of advanced, data, and Internet services increased 86 percent and accounted for 70 percent of the company’s total revenue. Overall revenues increased 70 percent to £840.4 million, with advanced, data, and Internet services contributing £585.5 million. EBITDA rose 53 percent to £141.7 million, while the company’s operating loss (EBIT) deepened to £38.2 million. Internationally, Continental European markets accounted for 19 percent of overall revenue, compared to 10 percent in the previous fiscal year.

In May 2000, Energis acquired a 45 percent interest in Eurocall Ltd. for £20.25 million. Founded in 1995, Eurocall was a leading independent switchless reseller based in Manchester, England. Its customer base of small and medium-sized business enterprises (SMEs) was located in northern and middle England. The acquisition gave Energis a foothold in the SME market and allowed the company to offer SMEs a more comprehensive portfolio of telecommunications services.

In mid-2000, Energis re-branded two of its key businesses, Planet Online and Datarange, to take advantage of the Energis brand. Planet Online was renamed Energis Squared and positioned as an e-business solutions provider that offers a complete portfolio of Internet services and connectivity to customers across Europe. Datarange, which specialized in network integration, was renamed Energis Integration Services. Around this time the company also launched Energis Mobile, which offered Energisbranded mobile phone services in association with Orange, the United Kingdom’s fastest growing mobile phone operator.

Taking advantage of its position as the primary IP (Internet Protocol) supplier to the U.K. travel industry, Energis launched the Energis Travel Network in July 2000. The Energis Travel Network was an end-to-end IP solution for travel companies and tour operators. Energis estimated that by allowing tour operators to connect directly to the Energis Travel Network for a flat annual fee, it would save the U.K. travel industry more than £15 million annually.

Energis continued to develop its metropolitan area networks and its pan-European strategy in 2000-01. In November 2000, the company completed metropolitan fiber optic rings in Glasgow and Edinburgh, Scotland. In Germany, Energis formed Energis Deutschland to combine its acquisitions and Internet data center there, while in Poland NG Koleje Telekomunikacja (NGKT) was renamed Energis Polska. Energis Polska was in the process of building a broadband fiber optic network to connect the largest towns and cities in Poland as well as a new data center in Warsaw. In January 2001, Energis acquired a 75 percent interest in Ision Internet AG of Hamburg, Germany, for about $742 million (EUR 800 million) in cash and stock. Ision was a leading web hosting and ASP company with a customer base of more than 800 companies.

Key Dates:

1993:: Energis plc is founded as a private company by National Grid Group plc.
1994:: Energis establishes its national telecommunications network and begins its first service.
1997:: Energis plc is floated as a public company on the London Stock Exchange and the NASDAQ.
1998:: The company forms the joint venture MetroHoldings Ltd. with Deutsche Telekom and France Telecom.
1999:: Energis forms the joint venture nevada tele.com in Northern Ireland and begins expansion into Europe.
2000:: The company acquires German telecommunications firm carrier24.
2001:: Energis launches BrightBlue, an interactive joint venture with Graham Technology.

New initiatives for 2001 included the creation of Energis Interactive, a joint venture with software developer Graham Technology. Energis Interactive’s principal project in 2001 was the launch of BrightBlue, a consumer portal for content providers. It was Energis’s first entry into the consumer market. At the beginning of the year the company signed a carrier agreement with interactive digital satellite TV provider British Sky Broadcasting. The four million homes served by Sky would be able to access a broad range of services offered on BrightBlue through interactive TV, the Internet, and mobile phones. Among the services offered on BrightBlue when it launched in November 2001 were shopping, banking, travel, betting, and employment.

Meanwhile, Energis’s CEO since 1996, Mike Grabiner, resigned suddenly in May 2001 and was succeeded by COO David Wickham. Around the same time Energis announced that its chairman, Gordon Owen, was also resigning.

In July 2001, Energis merged four of its U.K. companies— Energis, Energis Mobile, Energis Squared, and Energis Integrated Services—to form a single, unified organization. This restructuring enabled the company to provide an integrated approach to all of its customers’ e-commerce, IT services, and telecommunications requirements.

For the six months ending September 30, 2001, Energis reported a 33 percent increase in revenue to £487.9 million. Higher margin advanced and Internet services accounted for 70 percent of revenues. While difficult market conditions slowed revenue growth, the company strengthened its financial position by reducing capital expenditures, realizing cost savings, and increasing its medium-term debt facility from £600 million to £850 million. However, market conditions continued to deteriorate for the rest of 2001, and in November the company announced it would cut 350 jobs in the United Kingdom, Germany, and the Netherlands, leaving it with a workforce of 3,500 employees. Further cost-cutting measures were announced in January 2002, when the company lowered its estimates for the fiscal year.

There was no doubt that Energis faced a challenging business environment in 2002. The company was confident its market position and financial condition would enable it to weather the downturn in the telecommunications market. It would have to wait for improved market conditions to see if revenue growth would return to previous levels.

Principal Subsidiaries

Energis Carrier Services (Switzerland); Energis Netherlands; Energis Deutschland (Germany); Energis Polska (Poland); Energis Interactive (50%); MetroHoldings Ltd. (50%); nevada tele.com (50%).