Ihug-Force anything but a done deal

Ihug and Force Corporation go into today still unsure of whether Force shareholders will approve their planned merger.

Ihug and Force Corporation go into today still unsure of whether Force shareholders will approve their planned merger.

Shareholders are to vote today on the reverse takeover of Ihug by the listed property and entertainment company Force to create the new entity, Ihug Networks.

The Nasdaq's horror week last week - capped by a record 9.67% drop on Friday - may make Force shareholders even more wary of entering the tech sector than they were.

On Friday, Christchurch-based EstarOnline cited the parlous state of the Nasdaq as one reason for its decision to withdraw its submission to list locally even though it had raised the $10 million it had been aiming for. Local e-commerce and IT related shares such as Advantage Group, Strathmore Group, IT Capital, Beauty Direct all slid last week.

Also on Friday, Ihug's erstwhile partner Sky Television and its new ally, Telecom, gave notice that Ihug will not have the TV-telephony convergence model to itself. The pair announced the trial of a "one-stop shop" allowing consumers to buy digital TV, telephony and Internet services as a single package.

Telecom will be the customer contact point for what spokesman Mark Ratcliffe describes as "a step toward the day when the actual technology delivering these services converges." When the nationwide trial starts Telecom will take orders, provide customer support and generate a single bill for both its own and Sky's services.

The move comes in the wake of Telecom's purchase of a stake in INL which in turn is a shareholder in Sky. Both INL and Sky are controlled by Rupert Murdoch's News Corporation.

The Ihug-Force proposal, unveiled on February 8, would see the issue of 210 million Force Corporation shares for 100% of Ihug. The deal was struck at a price of 57 cents per Force share and ascribes a value of $120 million (or around $1000 per subscriber) to Ihug. Force shares, which originally rose strongly on the news, closed last week at 60 cents, down 10 cents on the week's trading.

With their price premium evaporating, Force shareholders may cool on the deal. The Disney family vehicle Shamrock Investments, which holds a minority stake in Force, is understood to have voiced misgivings about the proposal.

If the proposal is approved, it is likely to be followed by a major acquisition announcement. But even if it isn't, it may not mean a great change for the Ihug strategy. Tappenden Holdings (the Alan Gibbs and Trevor Farmer investment vehicle whose 10% stake in the current Ihug business was announced on the same day as the Force proposal) appears to be taking a close and active interest in the ISP and will be providing advice on the company's new e-mmediate Internet-based dispatch service.

One motivation for Ihug in seeking a backdoor listing via Force was to make it easier for offshore interests to invest in it, and such investments could proceed on a private basis.

If the proposal is approved, Ihug founders Nick, Tim and John Wood will together hold a 47% share of the new entity. Tappenden will hold 6% of Ihug Networks, and other interests, including Ihug director Bart Kindt and an employee share trust, 4%.

Chairman of the merged company is to be former executive director of Lion Nathan, Mike Smith. The other directors of the company will be Nick Wood and Tim Wood from Ihug; Peter Francis, Mike Daniel and Derek Presland who are existing directors of Force; and Tappenden representative Rob Campbell.

Ihug's CEO Nick Wood will continue as CEO of the Internet operations and Presland will continue as CEO of the Force operations while a long-term management structure is put in place.

Meanwhile, unlisted public company EstarOnline, the owner of the e-tailer CDStar, will resume trading on the secondary board - suspended because of its IPO - after it has returned the capital it has raised to investors.

EstarOnline CEO Matthew Darby says the company was faced last week with the choice of proceeding with or withdrawing its IPO.

"It's a tough call when you have $10 million sitting there and you know you can use it but it wouldn't have been prudent with these market conditions. We wouldn't have been getting the best value."

Darby says the company may return to an IPO in a few months' time but couldn't give any firm indication as to when because of the uncertainty of the market.

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