Europatweb seems a mixed blessing for cautious web investors, say Katharine Campbell and Samer Iskandar

Europatweb, the internet investment vehicle of Bernard Arnault, the French businessman, could not do more to frighten off today's nervous internet investors if it tried.

First, as it was revealed this week, Mr Arnault has revealed he sustained a E10.5m ($10m) write-off in his investment in Boo.com, the collapsed e-tailer that so neatly epitomises the excesses of the dotcom feeding frenzy in Europe.

Second, the E480m portfolio of 40 internet investments that has been built since Europatweb was formed a year ago has a very high concentration in the deeply unfashionable business-to-consumer e-commerce area.

And lastly, one of the planks of the Europatweb offering to the entrepreneurs it backs is incubation - in which start- ups are nursed through the early stages of their development. The share prices of listed incubators have recently plunged, and investors have seen the beginnings of a consolidation in the sector.

Despite all this, Europatweb still says it is aiming for an initial public offering "before the end of the year". It is understood not to have ruled out braving the markets as soon as this month.
"If it succeeds, it will only be through the sheer force of Arnault," is the view of one London-based venture capitalist.

r Arnault gets high marks for being an early European internet visionary. His investment record is patchier. In the US, he participated (through a number of personal vehicles) in the highly successful listing of Ebay in September 1998. Other investments, such as MP3.com, are another matter. On the European scene, he also gets high plaudits for being early - then again, that meant investing in Boo.

Initially, Mr Arnault's approach was to take small minority stakes in promising start-ups, often in pre-IPO rounds of financing.

That strategy changed in the middle of last year, when Europatweb was set up - capitalised to the tune of E500m, in effect, by the family holding company, Groupe Arnault. The new "industrial" approach involves taking larger stakes in companies, at the earliest possible stage, to create a synergistic group. There has also been a new emphasis on board-room representation, to increase Europatweb's influence. While the company says it is unique, CMGI, which is listed on Nasdaq, is a near-equivalent.

So what of Mr Arnault's record? These are very early days. The most successful investment to date in Europatweb is Liberty Surf, the French internet service provider, where Europatweb is showing unrealised gains of about E1,016m, even though the stock is at less than half its March high.

Europatweb likes to present Liberty Surf as an example of its incubation strategy at work. However, this is not quite accurate, because the seed round of financing took place before Europatweb was created. Liberty Surf is the only investment that Mr Arnault made before June 1999 which is included in the new company's portfolio.

The initial investment in Boo was also earlier, having been made at the end of 1998. Unsurprisingly, people close to Mr Arnault are keen to distance Boo from Europatweb. The technicalities are opaque and more confusion arises from the fact that François Tisot, who sat on Boo's board, is also a member of the Europatweb team.

These executives stress the limited size of the exposure to Boo and present it as an example of the sort of deal that is no longer done. They talk of the frustrations of being a minority shareholder in a fractured capital structure with little influence.

eanwhile, Europatweb has had a striking rate of new investment - particularly given that it is experiencing some upheaval among its personnel. Jean-Bernard Tellio, who had been in charge of Mr Arnault's internet investments, left in September. He is understood to have disagreed with the new "industrial" strategy, and is now a managing director of the internet fund of Carlyle, a buy-out house. André de Baubigny, a former investment banker hired for the US operation, has also left.

VIDEO LINK: Jean Bernard Tellio defends his record

Europatweb now has 50 executives, in 11 offices in nine countries. The UK, German, Italian, Latin American and Japanese teams have all been assembled in 2000. The continuity in all this change is 33-year-old Chahram Becharat, a former LVMH executive, who is now group managing director.

Ahead of any listing, Europatweb can expect the e-commerce part of its portfolio (43 per cent by cost) to come under particular scrutiny. One of the biggest investments is Zebank, an embryonic retail financial portal, in which the group has invested E80m for an 80 per cent stake. The incubator will also need to explain to prospective investors just how it adds value through the keiretsu effect of its portfolio - and through the wider LVMH network.

Europatweb cites a range of help it offers, from recruiting new talent, to aid in forging partnerships. Some portfolio companies say they are already finding the international network helpful. However, others complain about investments in competing companies and claim that Europatweb's fondness for quasi-controlling stakes can sometimes make it harder to forge other strategic partnerships outside the group.

Nevertheless, Europatweb does have some promising stories to tell. One is Flutter.com, a gambling site, in which it purchased 45 per cent last October. Despite the current nervous climate, the latest round of financing has created great excitement among venture capitalists, who have placed a post-investment valuation of E178m, according to Europatweb, for a site that has only just been launched.

eanwhile, the recent appointment of Bernard Giroud as chief executive poses interesting questions. He is the former head of Intel Europe, and has been running Schroder Ventures in Paris. His 59 years are meant to balance the youthfulness of 33-year-old Mr Becharat. One of his tasks will be to quell charges that, despite the talented group of people now assembling at Europatweb, it essentially remains a one-man show in the grip of Mr Arnault.

If the IPO does not go ahead, Europatweb will face some difficult questions. High-flying executives unable to exercise their share options might become restless. Without shares as acquisition currency, the group would also struggle to play a full part in the expected wave of consolidation of internet companies in coming months. Since Europatweb does not cash out its stakes at IPO, money for new investments and follow-on rounds would presumably have to involve Mr Arnault writing further cheques - something he is, however, said to be willing to do.

Some observers wonder why Europatweb did not structure itself like a venture capitalist, which would face none of this public scrutiny. Shares in CMGI have lost 60 per cent of their value in the past three months. The American company faces hard choices about which companies to support when it cannot raise new money from the stock market. All in all, Europatweb has not chosen the most alluring model.



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Europatweb