Deal of the month: Advent International takes over CyberCity: www.cybercity.dk

“Advent is proactively investing in emerging players in the unbundled local loop where this market is deregulating. Denmark is one of the first countries in Europe to deregulate the local loop and because of its high Internet penetration it is one of the early adopters of broadband services,” says James Brocklebank, principal at Advent International. With the market sector and possible geographic areas selected, it was left only to identify potential targets.

Having fired off an email to Klaus Riskaerpedersen, the founder and chief executive of CyberCity, on October 4, 1999, Brocklebank picked up the phone the following day. A face to face meeting came soon after and many more followed before Advent International put a draft term sheet on the table in early December. The deal was eventually closed March 24 this year. The deal was structured as a pure equity sale with Advent International taking around 90 per cent of the business and Merrill Lynch, Four Seasons Ventures and Gilbert Global Equity Partners taking the remaining equity between them.

Brocklebank notes that Four Seasons Ventures and Gilbert Equity Partners each have seats on the board and, by bringing each of them into the deal, Advent International was looking to capitalise on their investment experience in this area. Merrill, although not taking a seat on the board, was invited for its telco experience, according to Brocklebank, who is sidelining the importance of potential benefits at exit at the present time.

John Bernstein, a director at Advent International, is also joining the board of CyberCity. “CyberCity has a great market position and reputation for innovation in Internet and data services. We have backed many companies in the telecoms sectors and CyberCity, with first mover advantage in its region, is a good example of the type of business we seek to help. We very much look forward to working with the company to implement its aggressive growth strategy,” says Bernstein.

It is evident that this deal structure and its allocation of board seats is attractive to Advent International given that Klaus Riskaerpedersen has backed out of the business completely. He will act as a consultant for the time being. Advent has spent the time since completion searching for a new chief executive officer and a new chief financial officer. Brocklebank expects to be able to announce who will be filling these positions by early May and is giving nothing away except to say that there is a wealth of experienced talent in Denmark. In the absence of a chief executive officer and a chief financial officer, CyberCity’s chairman John Helmse-Zinck is holding the reins.

Helmse-Zinck has all the right credentials: a MBA from Harvard, a spell at LEK Partnership, Denmark managing director of AT Kearney and so on until he was called upon by Advent International to take up the chairmanship at CyberCity. Helmse-Zinck recently appointed managing director of Danske eVentures was at this time running his own consultancy, something that he will continue during his tenure at CyberCity.

Helmse-Zinck and the Advent team have their work cut out, if only because CyberCity has a domestic reputation for carving out firsts. Says Brocklebank: “[CyberCity] was the first in Denmark to launch free ISP product, the first to offer flat rate products, and the first independent company to offer DSL.” And the company has posted a profit from the start, recording revenues of around DK130 million in 1999.

CyberCity was founded as an Internet cafe in Copenhagen, launched in its current guise in 1995, and soon became an ISP. CyberCity also provides data services though Yellow Web, online shopping facilities through NetShop and an auction site. The company also has a long-standing agreement with Yahoo! Denmark (www.yahoo.dk) which points Yahoo! users in the direction of CyberCity as a potential service provider.

“CyberCity currently has around 165,000 customers in total across Denmark, Sweden and Norway. The customer base is largely a mixture of high-end residential and small businesses. Following our investment CyberCity will extend its customer base and accelerate expansion across Scandinavia,” says Brocklebank. He indicates that while nothing has been set in stone it is anticipated that the focus will be on organic growth from the outset.

One of the first steps in this organic growth has been to focus on the business-to-business side of CyberCity existing and potential customer base. “CyberCity has set up a B2B division to focus on the corporate market offering broadband access, VPNs and data services,” says Bernstein. According to Intenational Data Corporation 1999 Denmark is expected to have the highest penetration of residential DSL in Europe at around 9 per cent by 2004. This figure is provided against a backdrop of a market where the local loop is fully unbundled and around 25 per cent of households currently have Internet access.

“Our intention is to continue to focus on broadband service providers and Advent will continue to look throughout Europe for emerging fixed and mobile broadband companies. We think broadband is at an early stage of development with enormous growth opportunities,” says Brocklebank. Advent International’s experience of broadband services in Europe to date rests with Jazztel says Brocklebank. Jazztel is looking at broaddband, although the Spanish market in which Jazztel operates is not fully unbundled. Jazztel was a $72 million Advent International and Apax Partners telecommunications start-up last spting that offers local, national and international voice and data services including Internet and

broadband communications with a flat-rate pricing structure. Jazztel, one of the first independent telecoms providers to be granted a full-service national telecoms license in Spain, floated on NASDAQ and EASDAQ in December last year.

Other Advent International investments in the telecoms field include CyberThon (Austrian full service telecoms provider floated on the Vienna Stock Exchange in December last year), Eunet (the pan-European Internet access provider), ESAT Telecom and ART (the US

facilities-based broadband ISP.)

This latest investment in CyberCity by Advent International has been made from the firm’s 1997 Global Private Equity III fund, which closed with around $1 billion in commitments. How far the fund is committed is not clear. However Advent International has indicated that it intends to raise its fourth Global Private Equity fund later this year.