Scottish Power set to cash in on its telecoms arm

Demon Internet and Scottish Telecom customers face an uncertain future, following reports that Scottish Power is to sell off its fast-growing communications division.

After initially losing money, Scottish Telecom has begun to make a profit.

Investment bankers Goldman Sachs has been appointed to advise on the telco's growth.

"I wouldn't blame Scottish Power for cashing in on the current high valuation of telcos," said Schema analyst Alan Pyne. "There are concerns that the telecoms bubble could burst. In order to reduce that risk they should float as soon as possible."

Valuations of Scottish Telecom range from #1.1bn to #2bn. The flotation would free the telco to raise its own funds. At present most of its 400 biggest corporate customers are Scottish, but future growth lies outside of Scotland.

One alternative to flotation is selling a majority stake to another telco such as fellow utility-controlled Energis or one of the big three cable operators.

"Scottish Telecom is likely to be a target for a more established telco, rather than one at a similar stage (Energis). It would make more sense for one of the cable operators to be interested," said Pyne.