It doesn't take much reading of America Online Latin America's initial public offering prospectus to figure out that AOL Latin America isn't part of the same America Online Wall Street loves.
In fact, if it weren't for the AOL moniker this IPO wouldn't be worth a passing glance.
"AOL and AOL-LA are two separate companies. An investment in AOL-LA is not an investment in AOL, nor is AOL's investment in AOL-LA a recommendation for you to purchase shares of AOL-LA's class A common stock," the company notes in its regulatory filings.
Folks, they aren't kidding. AOL Latin America is behind competitors such as Terra Networks and StarMedia on nearly every measure.
Of course, the name alone may boost AOL Latin America shares. AOL Latin America is expected to price 25 million shares tonight between $15 and $17. The deal, underwritten by Salomon Smith Barney, is likely to be one of this week's IPO headliners.
AOL Latin America, which is jointly owned by AOL and the Cisneros Group of Companies, is AOL's entry to the booming markets of Brazil and its neighbors. IDC projects that the number of Internet users in Latin America will increase at a compound annual growth rate of 41 percent over the next three years to 29.6 million.
With those stats, it's not surprising that Latin America is already staked out by StarMedia among others. Given the success of AOL Latin America's namesake, you can reasonably expect strong Wall Street interest.
Is it worth it though?
For starters, AOL Latin America is young. Very young. It began offering interactive services in Brazil in November 1999. As of 25 June, AOL Latin America had 129,000 subscribers in Brazil, and many were under free trial subscriptions. The company plans to offer services in Mexico and Argentina this quarter and then target other countries in Latin America.
For the nine months ending 31 March, AOL Latin America reported a net loss of $51m on revenue of $5.2m. AOL Latin America said 56 percent of its revenue reflected subscription fees attributable to CompuServe Classic subscribers acquired from AOL. "We expect these CompuServe revenues to decline significantly," the company said.
And then there's the huge issue of competition. AOL Latin America, which doesn't have the headstart its namesake had, will derive most of its revenue from subscriptions. It's a shame many folks in Latin America use free access. Universo Online, or UOL, one of Brazil's largest Internet service providers, and Terra Networks each offer free Internet access services as well as billable plans in Brazil.
Various Brazilian banks, including Bradesco and Unibanco, have begun offering free limited Internet access services in Brazil to their online banking customers. Prodigy and Yahoo! are also players.
Add it all up and you have a price war. AOL Latin America, which doesn't have the critical mass to push price increases like AOL, said it has already cut prices. You'd think that AOL Latin America would get by with a little AOL name dropping to boost market share, but it hasn't worked.
"We are experiencing higher than expected subscriber cancellations in Brazil, presumably because of the availability of free service," the company said.
"Due to this increased competition from free service providers, we have not only lowered our prices but have also substantially increased our advertising spending and our spending for content in an effort to attract more subscribers."
In addition, there are some quirks in the company's relationship with Cisneros and AOL.
In terms of voting power, AOL will control 49.51 percent and the Cisneros Group will control 47.54 percent. AOL and Cisneros could develop competitive services to AOL Latin America. Both shareholders "have interests that conflict with your interests and are free to place their interests ahead of yours," said AOL Latin America.
Other notable stipulations of AOL Latin America's licensing agreement with AOL include:
- AOL Latin America can exclusively provide AOL-branded services in Brazil, Mexico and Argentina, but is prevented from offering services to Spanish and Portuguese-speaking consumers outside of Latin America.
- AOL Latin America has no rights to market non-AOL-branded interactive services owned by AOL, including Netscape, DigitalCity and MovieFone.
- AOL Latin America relies on AOL to localise its service for Latin America. AOL Latin America has little control over the timing. The network is also hosted in the United States.
The IPO from AOL-LA is likely to be this week's initial public offering headliner. It has all the right statistics, but the question on Larry Dignan's lips about investing in this young company is 'is it worth it?' Go to AnchorDesk UK for the news comment.
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