Tangled Wires On Vodafone Talk

A more logical target would be a UK operator with a national network such as Energis, the telecoms company owned by the National Grid which is actively seeking a partner. Andrew Harrington, senior telecoms analyst for Salomon Brothers in the UK, says the priority for an operator like AT&T is to add to its global fixed wire assets to improve its ability to offer one-stop shopping to large customers: No multinational corporation will be persuaded to give its business to AT&T simply because of Vodafone.

There are potential conflicts of interest in Germany and France. In Germany, for example, AT&T has an alliance with Mannesmann, the engineering and telecoms group which operates the D2 mobile phone service in competition with both Deutsche Telekoms own mobile network and E Plus, in which Vodafone has a 22.4 per cent stake. In France, Vodafone is associated with BT through a complex series of shareholdings in the mobile consortium SFR and the Cegetel group, which again would make acquisition difficult.

 

An acquirer would probably have to pay a substantial premium to Vodafones price last night of 243 1 /2p, which values the group at 7.45 billion. Deutsche Morgan Grenfell estimates Vodafones UK interests at about 5 billion and its extensive interests overseas, using discounted cash flow calculations, at about 3.5 billion.

This would value the stock at 280p-285p - and a premium could take that to 300p-350p. Our view is that on fundamentals, the Vodafone price deserves to go up while the Cable and Wireless price [it has announced the merger of Mercury Communications with three UK cable companies] deserves to fall. Vodafones share price rise since the C&W and BT/MCI deals has reversed a previous decline that was prompted by fears of the group losing market share, coupled with concern that growth in the UK is slowing. Neither concern seems to be justified and most analysts believe Vodafones fundamentals are strong. Its market share, according the the FT newsletter Mobile Communications, has moved from 42.6 per cent in March to 42.04 per cent last month, while Cellnets fell from 42.2 per cent to 40.22 per cent. Some observers believe the UK market is set for saturation at 15 per cent penetration, compared with about 10 per cent at present. However, most believe 25-30 per cent is more likely and the market slowdown has been temporary. An important trend in the telecoms industry is convergence between fixed and mobile operators which means that Vodafone may be acquired at some stage. Mr Harrington, of Salomon, thinks that may be three to four years away.