Like America’s Ted Turner, who prospered when few thought he could survive, Renato Soru of Tiscali is racing to stay a step or two ahead of catastrophe as he builds his European empire.
By David Lanchner
May 2001
Institutional Investor Magazine
Like America’s Ted Turner, who prospered when few thought he could survive, Renato Soru of Tiscali is racing to stay a step or two ahead of catastrophe as he builds his European empire.
Mild-mannered but quietly intense, Renato Soru routinely puts in 14-hour workdays yet still finds himself rushing from task to task.
It’s no wonder the founder and chairman of Tiscali, the Milan-based Internet service provider, is often overextended and on the verge of exhaustion.
He has certainly been busy. In a 17-month buying spree, Soru has made some two dozen acquisitions - notably, last December’s pickup of the scandal-tainted World Online - at a cost of E5.49 billion ($4.9 billion), most of it paid for with Tiscali’s once-high-priced stock. In the process, he has transformed Tiscali from a small Sardinian Internet company with 500,000 users in Italy into the first pan-European Internet service provider, with more than 7 million active customers in 15 countries. Late last month in a whirlwind two weeks, he made three buys, including LineOne, the U.K. ISP, and Planet-interkom, the German ISP.
With those two deals, Soru asserts that Tiscali is now the largest ISP in Europe. It is at least running neck and neck with Deutsche Telekom’s T-Online, and bigger than France Télécom’s Wanadoo, Telefónica’s Terra Lycos and AOL Time Warner’s AOL Europe.
These days, however, the markets look on the entire European ISP business with a jaundiced eye. Many stocks are down more than 90 percent from their March 2000 highs. And some investors are particularly skeptical about Tiscali’s ability to survive in Europe’s overcrowded and fiercely competitive market, despite the firm’s rapid growth. Last year Tiscali had an ebitda loss of E452 million on revenues of E407 million. None of the big ISPs in Europe has shown a profit as yet, but unlike Tiscali, the others have parents with deep pockets. Soru must walk a financial tightrope on his own.
Still, succeeding against expectations and with limited resources has been the hallmark of Soru’s life. By the age of 10, he was working in his father’s grocery store in Sanluri, a small village in Sardinia, one of Italy’s poorest regions. After earning a degree in social and economic studies at Milan’s prestigious Bocconi University, he worked as a derivatives trader at a couple of small financial institutions in Milan. When he saw a Bloomberg financial news terminal in 1991, he realized how online technology could upset the established order of things. “I was impressed that an entrepreneur and former Salomon Brothers bond trader like Michael Bloomberg could take on a giant like Reuters,” says Soru, now 44.
Bloomberg may have inspired him, but Soru’s career from that point on more closely parallels that of another American entrepreneur, Turner Broadcasting System’s Ted Turner, who built a cable empire in the teeth of competition from powerful and entrenched television networks before selling out to Time Warner in 1996. Like Turner two decades ago, Soru must keep running just to keep from being run over. Like Turner, he gets little respect, even from some of his investors - never mind his competitors. Like Turner, Soru is strapped for cash but seems to relish taking big gambles and rejoices in thumbing his nose at skeptics. And if he can keep running fast enough to survive the current Internet and dot-com crash, Soru, like Turner, could cash out a billionaire.
Run he does. Institutional Investor interviewed Soru in Tiscali’s new headquarters, squeezed in between business meetings. But after less than half the time allotted for the interview had elapsed, Soru abruptly jumped up and fled the converted warehouse to attend yet another meeting. The interview continued hours later during a rare coffee break for Soru at a homey pasticceria off Milan’s Piazza della Scala.
In those harried conversations, Soru, looking edgy and tired, outlined his plan to best Europe’s biggest telephone companies: “Our strategy relies on building up a proprietary communications and portal infrastructure in Europe, on cutting costs as quickly as possible and on gaining size as quickly as possible,” he says. “If we can expand while others are focusing on their domestic markets, which is what is happening, we will be the only truly international Internet company in Europe, while the others are just national. Ultimately, we will be a fully integrated pan-European Internet communications company, with revenues from connection fees, [from] retail advertising, [from] commissions from online sales of retail products, and from business services like Web hosting.”
Many are skeptical of Tiscali’s pan-European strategy. Although the company may be Europe’s largest Internet service provider in terms of traffic - measured by minutes online - and number of accounts, it doesn’t hold the top market position in any of the countries in which it operates. Even in its home market, Tiscali is only Italy’s third most popular portal. With an estimated 1.45 million users, it ranks just behind Infostrada and Seat Pagine Gialle, which have about 1.7 million and 1.6 million users, respectively. “National market dominance will be key to capturing high-margin revenues from advertising, e-commerce and business services as the European industry struggles for profitability,” says Helen Omwando, an Internet consultant with Forrester Research in Amsterdam. “Even in its best markets, Tiscali only has the second or third spot and will have a harder time making money than its competitors.”
Soru contends that his vision and rapid-fire decision making give him a major advantage that will allow him to triumph over his rivals. “We will reach breakeven in the second half, and we expect to reach profitability next year,” Soru promises. “I think we will be here in January 2002 with a solid, normal company that is No. 1 in Europe and fast-growing.” Terra Lycos says it will break even by the beginning of 2002, while Tiscali’s other main competitors are expected to register losses until 2003.
Tiscali’s position as an ISP independent of the telecommunications behemoths is key to achieving Soru’s goals. “Can you imagine France Télécom, Deutsche Telekom or Telefónica allowing their respective subsidiaries, Wanadoo, T-Online or Terra Lycos, to offer Internet telephony or even two-way video conferencing?” Soru asks skeptically. “As Internet voice and video technology improves in the next few years, they will never move as fast on these fronts as us because it threatens their traditional voice businesses. This will be critical to our ultimate success.”
At the moment, though, such ambitions remain pie in the sky. E-commerce is in its infancy in Europe, while high-speed technology for Internet video streaming and voice telephony is at least a couple of years away from mass-market introduction.
Tiscali’s immediate challenge, Soru admits, is to integrate its vast group of companies and achieve profitability as rapidly as possible. “We want to be here long term and survive the current panic,” he says. “We came to the IPO market in October 1999 on only E4.5 million in [cash on hand] and built an international presence with a corporate headquarters budget of only E4 million last year and acquired most of our network using our shares. Now as we integrate our acquisitions, if we want to survive, we must apply our cost-cutting culture to all our companies.”
Tiscali believes it can almost double revenues from E407 million to E800 million this year, while lowering costs - about E1 billion last year - by E340 million. “We are on target for 40 percent growth among active users this year, which should allow us to break even sometime during the second half,” says Massimo Cristofori, Tiscali’s chief financial officer. In addition to increasing access fees, which make up 87 percent of Tiscali’s Internet revenues, a key component of breaking even will be increasing advertising, e-commerce and business service revenues, which have gross profit margins of between 40 and 70 percent, compared with the 5 to 15 percent gross margins that come from providing Internet access.
It has been a short, swift ride from derivatives trader to the top ranks of Europe’s Internet CEOs for the man from Sardinia.
Shy and increasingly uncomfortable in cosmopolitan Milan, Soru returned to his native province in 1993. A mountainous island some 200 kilometers southwest of Rome, Sardinia is famous in Italy for the insularity of its people and its customs. Soru built the island’s first supermarket and two shopping centers there before turning to the Internet.
In 1995, while building his third shopping center, in Prague, Soru invested L200 million ($92,900) of his own money to start Czech On Line. An offshoot of what was then Sardinia’s largest Internet service provider, Video On Line, owned by Nicola Grauso, Czech On Line thrived while its parent went bust - largely because it did not keep a tight rein on spending. It was an early reinforcement of his childhood lesson at his father’s grocery of the need to control costs. In 1998, after Italy deregulated its telephone market, Soru sold Czech On Line to Deutsche Bank for E10 million and returned to Sardinia’s capital, Cagliari. He used the proceeds of the sale to start Sardinia’s first discount telephone operator, Tiscali.
Soru named the communications company after a 5,000-year-old fortified village built inside a giant, imploded cave in the island’s remote central mountain range. The village has come to symbolize Sardinia’s isolation from the rest of Europe. “We are basically a Sardinian company trying to prove we can build a world-class company with the resources and strengths of a very regional culture,” says Soru with pride. He decorates his offices with folk art from Sardinia and listens to Sardinian folk music to relax. “We are working to prove that it is possible to compete and to succeed from the south of Italy, from what is basically an emerging country.”
That mind-set has bred unusual attention to cost and an exceptionally well integrated senior management team. In addition to Soru, Tiscali’s two most senior executives, Mario Mariani, head of marketing, and Paolo Susnik, chief technology officer, come from Sardinia. CFO Cristofori does not, but he has known Soru for 26 years since they were students together at Bocconi. Cristofori was also Soru’s best man and is godfather to one of his four children.
“Soru may be trying to build an international company,” says a former executive of the recently acquired World Online. “But he’s an insular Sardinian in the sense that he’s not comfortable with outsiders and likes to take decisions with a small group of trusted friends and advisers.” Although Tiscali’s international headquarters was moved to Milan late last year to be closer to the company’s growing European operations, Soru tries to spend at least a few days every week in the Cagliari offices of Tiscali’s Italian ISP. “Although he works around the clock, he’s much more relaxed in Sardinia,” says a colleague.
Tiscali shifted its core business to the Internet in early 1999, after Soru read about the rapid growth of Freeserve, Britain’s first ISP to offer free Internet access. On the back of “free access” - instead of charging subscriptions, phone charges are split with telco operators - Tiscali rapidly expanded its services to all of Italy. By the time it went public in 1999, Soru’s upstart company was Italy’s third-largest Internet service provider. Its main competitors are the country’s long-established yellow-page provider Seat Pagine Gialle and Infostrada, now owned by Italy’s largest electrical utility, Enel.
Soru says that when Tiscali presents its first-quarter results this month, it will show a small profit before interest, depreciation and amortization for its Italian business, making it the only one of the three Italian outfits to show an operating profit from the Internet thus far.
When Tiscali went public on October 27, 1999, underwritten by ABN Amro Rothschild and Banca d’Intermediazione Mobiliare IMI, it listed on Italy’s small growth-stock market, the Nuovo Mercato. The company sold a 23 percent stake, or 3.04 million shares, at a price of E46 per share, raising E140 million. Adjusted for a 10-for-1 split on Valentine’s Day 2000, the stock rocketed to a high of E115.70 in March 2000. In the aftermath of the pricking of the Internet bubble, Tiscali stock plummeted also. But it still sells at E15, more than triple its split-adjusted offering price, while its main European competitors sell below their offering prices. Soru still owns 31.6 percent of Tiscali stock, worth E1.44 billion.
At the time of the IPO, Soru’s goal was to build up Tiscali’s Italian operations, but he soon began taking advantage of the company’s soaring stock to build a more ambitious Internet presence. In total, Soru has bought three specialized providers of fixed-line or fiber-optic connections in Europe, 11 ISP/portals (many with their own fiber-optic networks), five Internet infrastructure companies and two content providers.
“He’s done everything he possibly can to leverage his company’s finances,” says Enzo Salvati, chief investment officer of Milan-based fund Arca SGR, which is one of Tiscali’s biggest institutional investors. It became clear in the aftermath of the tech-stock collapse that Tiscali could not raise from the equity market the E300 million to E500 million to integrate and build the companies it had acquired. Soru raised most of the money the company needed for the latter half of 2000 with a five-year, E250 million floating-rate bond issue. Co-lead managed by Banca Commerciale Italiana and Banca d’Intermediazione Mobiliare IMI, the bonds paid 325 basis points over the three-month European interbank borrowing rate and were sold largely to retail investors. Tiscali continued negotiating deals right up to the date of the July 2000 bond issue, even though by then the company had only an estimated E9 million left in cash, compared with the E14 million it burned through each month. The bond issue may well have saved Tiscali from going under.
Having figuratively clung to the edge of the abyss by his fingernails, Soru made his shrewdest moves yet. Last December he swapped 43 percent of Tiscali’s stock for World Online, a deal worth E4 billion on paper. But the value to Tiscali was very real - World Online had E1.4 billion in cash in the bank. For a company that just six months earlier had been scraping the bottom of its cash register, the purchase was a lifesaver. “The deal was key to stabilizing our financial position,” affirms Tiscali CFO Cristofori. “Before buying World Online we had only E150 million in cash.” Without the World Online deal, says Daniel Bieler, an analyst at Nomura International in London, Tiscali would have run out of cash by this June. Tiscali executives say they could have survived, but only by selling or shutting their international operations.
In January Soru strengthened Tiscali’s financial position a bit further by acquiring France’s Liberty Surf Group for a 10 percent stake in Tiscali, or roughly E450 million in stock, and E200 million in cash. But it got back E260 million in cash in the deal.
“On average they’ve paid around E350 per user, which ranks well below the industry’s acquisition average of between E500 and E1,300, depending on the type of ISP being bought,” says Bank of America’s Mathieu Robilliard. “You can fault Tiscali for many things, but you have to admit that they get good prices for their acquisitions.” A begrudging compliment, that.
Both deals brought Tiscali far more than just cash. The acquisition of World Online made possible Tiscali’s transformation into a true pan-European company. It allowed the group to expand its presence from six countries to 15, doubled its number of active users at the time to 4.7 million and complemented a loop of leased fiber-optic lines with a new northern loop. The purchase of Liberty Surf gave Tiscali France’s second-largest ISP, with an additional 900,000 regular users.
“Soru is one of the best negotiators I ever met in my life,” says one of his investment bankers. “He’s tough but low key, with a very clear idea of what’s important to Tiscali. He understands what is reasonable and almost always gets the conditions he wants.”
In those rapid-fire deals in April, Soru bought Planet-interkom and SurfEU, making Tiscali the third-largest ISP in Germany. He then bought LineOne, pulling Tiscali up into fourth place in the U.K. market.
The World Online acquisition shows Soru’s perceptiveness in sensing opportunity, his persuasiveness and his ability to bargain. The company became vulnerable after its controversial March 2000 E2.9 billion IPO, which led to a shareholder lawsuit. Filed by the Netherlands’ largest retail shareholders group, Vereniging van Effectenbezitters, the suit contends that information regarding the sale by World Online founder Nina Brink of two thirds of her stake at a fraction of the IPO’s price just months before the company’s listing was not adequately revealed in the company’s prospectus. World Online quickly fell from Internet darling to poster child for Web-mania run amok. Soru took advantage of the bad publicity - the suit itself was only filed in March 2001 - to negotiate an acquisition price as much as E1.3 billion lower than that which World Online originally demanded, according to a lawyer involved in the lawsuit. Since the VEB is seeking only about E100 million in damages from World Online, while Tiscali got a treasure trove of cash, Soru clearly cut a terrific deal.
But first, he had to persuade World Online’s majority shareholder to sell. The Geneva-based Sandoz Family Foundation and its hedge fund, Reggeborgh Participaties, are investment vehicles for the Sandoz family, the largest shareholders in Swiss pharmaceuticals giant Novartis. The two had rejected overtures from
T-Online, Wanadoo and Freeserve (since acquired by Wanadoo) as well as several others. They sold to Tiscali because “it was a perfect fit,” says Gabriel Pretre, the foundation’s CFO. “We share their vision that the phone companies have fundamental conflicts of interest when it comes to taking full advantage of the Internet and [believe] that, ultimately, major advantages will flow to independent pan-European operators with an entrepreneurial flair.” After the acquisition, the foundation owns 17.8 percent of Tiscali, while Reggeborgh owns 4 percent. It is a sign of Pretre’s confidence in Tiscali’s strategy that Sandoz exchanged its 55 percent stake in World Online for a 21.8 percent stake in Tiscali.
Some onetime investors don’t share Pretre’s faith in Tiscali’s strategy or in Soru’s ability to deliver profits. “We owned Tiscali and Wanadoo last year and made good money,” says Ed Protheroe, a fund manager at Aberdeen Asset Management in London. “We sold, thankfully before the sector’s crash, when it became apparent that it would be very tough for ISPs to make money, whether they were independent or telco-owned. ISP operations still have no profits, and there are too many of them, so we are staying away from the whole sector.”
Others have simply cashed out. Tiscali’s early supporter, Elserino Piol, a former senior executive of Telecom Italia, whose Kiwi I venture capital fund bought a 10 percent stake in Tiscali in 1998 for E2 million, has sold most of his shares in recent months at a profit in excess of E300 million.
Even fund managers who still believe in Tiscali’s independent, pan-European strategy pepper their endorsements with caveats. “We think Soru has a very innovative vision, but we are watching before we make a full commitment as a long-term shareholder,” says Arca’s Salvati. “They have also been wise enough to pay attention to the cost side, which will give them an edge. Even so, only time will tell if they can turn their vision into a profitable business.” Salvati sees Tiscali as a highly speculative value play. After buying Tiscali’s shares at the IPO, Salvati sold before Christmas 1999 when the shares had more than quintupled. “By last autumn the shares had been massacred, yet the Internet promised strong growth in Europe, so we started buying again and still are,” he says.
With a position of roughly E20 million, or about 0.44 percent of Tiscali’s shares, Arca is one of Tiscali’s two largest institutional shareholders, according to CFO Cristofori. The other big institutional holder is the Banca d’Italia pension fund with a stake of about the same size. Roughly 20 percent of Tiscali’s shares are held by institutional shareholders, says Cristofori. In addition to Arca and the Banca d’Italia pension fund, other institutional owners of Tiscali include Capital Research and Management, Alliance Capital Management and Putnam Investments. Several index fund managers, among them Barclays Global Investors and Vanguard Group, also hold Tiscali because with a E4.55 billion capitalization even now, it makes up an impressive 23 percent of the capitalization of the Nuovo Mercato.
Soru, who has never minded going against the grain, says his company will continue to make acquisitions, despite the skepticism of some analysts and investors: “It is a moment of panic in the market on the part of both shareholders and corporate managements. Now is the moment to look for deals and to become even stronger.”
After reaching the No. 3 ISP spot in Italy and Germany and the No. 2 market rank in France and the Netherlands, Tiscali is targeting acquisitions that can bring it a top three position in Spain and the U.K. - major markets where the company believes it must have a strong presence to attract sufficient advertising and e-commerce dollars to compete with the national heavyweights. Soru is also looking for acquisitions that can give Tiscali an edge in such areas as Internet telephony, secure payments for e-commerce and search engines.
As it has always done, Tiscali plans to finance the deals with stock. “The collapse in Internet share prices has actually helped us since we’ve managed to lose less value than the companies we’ve acquired, meaning we are paying less than we would have in the past,” says Cristofori.
Saying he’s achieved at least an operating profit in Italy, Soru is now turning his attention to fulfilling his promise to have Tiscali break even in 2001. But achieving a profit in its pan-European operations and pushing revenue and earnings growth across Europe will be tough as the company attempts to cut sales and marketing budgets more than 40 percent from last year’s E307 million to E182 million in 2001.
“Basically, no one’s ever tried to boost their presence in this industry while cutting expenditures on advertising and sales, but that is what Tiscali wants to do,” says Bank of America’s Robilliard. It will be even harder to do since the company is planning to rebrand under the Tiscali name the small ISPs it has bought, as well as its two well-established large ISPs: the tarnished World Online and Liberty Surf.
Analysts believe that if he can’t turn a profit soon, Soru won’t survive as an independent company and must sell. “I don’t consider the possibility [of a sale] because we will break even,” Soru says curtly.
Soru’s fervor for cost-cutting has cost him. He has had a hard time holding on to top managers at the companies he has acquired. James Kinsella, who replaced Nina Brink as World Online chief executive after she was pushed out in June 2000, briefly took on the same role at Tiscali, but lasted only two months. Kinsella is a former Microsoft Corp. executive who built the popular MSNBC news and entertainment portal in the U.S. His arrival at Tiscali soothed the nerves of many anxious investors who couldn’t see how Soru could pursue such an active purchase program and still have time to execute a thoughtful and coherent integration strategy. “My brief was to manage things on a day-to-day basis,” says Kinsella, “but it soon became clear that Renato was not willing to part with that authority.”
In the now-notorious “pizza incident,” Soru berated staffers at World Online’s Amsterdam headquarters in February for throwing away pizza ordered for staff meetings. The incident led Kinsella to conclude that Soru would interfere in even the smallest details of daily operations. But Kinsella may have missed the point. Like other veterans of the fat and happy days of the booming tech economy, World Online employees seemed casually extravagant to an entrepreneur like Soru. He concluded that people who wasted food were also capable of wasting scarce resources.
Soru says that given its rapid growth, Tiscali could not afford to have outsiders taking part in what is a well-oiled machine for rapid decision making. “Our overriding need is for a short and efficient decision-making process,” Soru says. “For that reason outsiders cannot easily be integrated into senior roles.
Along with Kinsella, eight other senior executives have left World Online since the Tiscali acquisition. A week after Kinsella’s departure, the founder of Liberty Surf, Pierre Besnainou, also left, complaining that pursuing a pan-European strategy before establishing dominance in a national European market did not make sense.
Soru’s real test, many say, will be to show not only that he can survive the Internet meltdown, but that he can grow and turn a profit, too. “I don’t think Tiscali can win the battle for market dominance with the large telecom-backed ISP/portals,” demurs Nomura International’s Bieler. “They simply don’t have the same deep pockets as their competitors. There are likely to be three dominant players in Europe at the end of the day, and I don’t see Tiscali among them.”
But Soru and Tiscali still have powerful backing from the Sandoz Family Foundation. Might Sandoz sell its position if Tiscali fails to break even in the second half or fails to make a profit in 2002, as Soru has promised? “There is no hard benchmark like that,” says Pretre. “But clearly it’s important for companies to start making money if they want to continue expanding.”
The measure of Soru’s success may lie not so much in beating the telecom behemoths as in doing well enough to sell out to an Internet giant like AOL Time Warner at a huge price. After all, that company, in a previous incarnation, made a multibillionaire out of Ted Turner. Could it do less for Renato Soru?
