Bottom drops out of British market for web hosting

Britain's tech industry was dealt a double-whammy of grim news yesterday with the announcement that CityReach, a web hosting business, had called in administrators.

Meanwhile, TeleCity, one of its stock market-listed rivals, last night launched a rescue rights issue to raise $NZ 60 million after merger talks with Redbus Interhouse, another web hosting company, collapsed.

CityReach, a so-called "internet hotel"based in London's Docklands, had been touted as one of the upcoming stars of the sector and had originally been hoping to float on the stock market at the start of this year.

The company, founded in 1999, was one of a number of start-ups that suddenly mushroomed purely to take advantage of the internet boom.

Internet hotels, or web hosting businesses, provide other companies with a secure, temperature-controlled environment for the computers which run web sites.

The logic ran that once the internet revolution truly got under way, the number of websites and dot.com companies needing internet hotels would rise. The sort of growth projections the internet hotels came up with based on that premise were enough to woo a host of investors to the feast.

CityReach refused to return phone calls yesterday and was said to be locked in meetings with KPMG, its administrator. The company's key investors could not be reached either.

The company is said simply to have had trouble filling the space it owned although it had recently signed up both BT Ignite and Nasdaq-listed USinternetworking as customers. Its original hopes of getting $114m deals spread over 10 years were clearly not materialising.

Irrespective of whether CityReach's cost-base was too high, its core problems are not unique. The corporate landscape has changed significantly in just two years.

More competitors have appeared on the horizon while demand has ebbed. Paul Smith, an analyst at Credit Suisse First Boston, said: "I think a lot of the market last year has really turned out to be a false market."

Many dot.com enterprises have since evaporated and many established firms have simply pulled out of internet operations - leaving a bigger pool of internet hotels fighting for a smaller number of customers.

CityReach, which had initially been gunning for dot.com clients, was forced to change its business model and go after large companies with internet businesses. "Where we expected this to be a dot.com revolution, it's been a corporate one," Mr Addanki said in March. Perhaps what CityReach had not factored in were the worsening economic conditions, the proliferation of competitors and the consequent falls in prices. Last Autumn, IXEurope, a rival internet hotel, was forced to pull its $1 billion UK market float in the face of poor market conditions.

TeleCity, which has suffered two profit warnings since it listed on the stock market in June of last year, said last night it would focus on cutting costs. It had already warned that if the talks with Redbus fell apart it would need to carry out a fund-raising exercise.

Many in the industry are predicting a round of consolidation but note that the process is likely to be problematic, demonstrated by the failure of the Redbus talks, since assets are becoming available via alternative routes. They also doubted whether assets would be fought over due to overcapacity in the marketplace. KPMG's Jim Tucker said he was "confident" of selling the core CityReach sites in London, Amsterdam, Dublin, Stockholm and Budapest centres as going concerns.

- INDEPENDENT