Vodafone: 3G Licence Cost is Not Too Much to Bear
26/5/2000 17:44 by Annemarie Quill
Telecoms Correspondent
Three months ago, when Chris Gent, chief executive of Vodafone (VOD:LSE) (Board), pulled off the world's biggest takeover battle, the œ105 billion bid for Mannesmann, success for Vodafone in the global telecom market seemed certain. Through the acquisitions of AirTouch in 1999 and Mannesmann in 2000 he had transformed the company into the leading telecom player. The world was about to fall at Gent's feet.
But it hasn't quite worked out like that. Since the merger, Vodafone's share price has slumped largely on the back of fear surrounding the costs of acquiring UK third generation licenses and building the necessary network to become the leading wireless player. But are those fears justified?
Vodafone is already well down the path of weaving its subsidiaries across Europe and the rest of the world into a global Internet platform. This looks certain to allow it to become a global portal operator, potentially with more subscribers than AOL. With a 45% stake in Verizon (the newly named Bell Atlantic, GTE and AirTouch wireless venture in the US), controlling stakes or 100% control in UK, Germany and the Netherlands as well as a majority stake in J-Phone in Japan, Vodafone is by far the leading global cellular operator.
Yet, while the shares touched 401p during the bid for Mannesmann, they have fallen as low as 227p despite numerous year-end targets as high as 600p. It's the cost of the company's 3G expansion which is fuelling the slump.
Vodafone has already secured a UK licence, paying the highest amount among the successful bidders - a whopping œ5.9 billion - for the best license. Over the next 12 months, 55-59 universal mobile telecom systems (UMTS) licences are expected to be issued to existing and new operators and consortia in 13 cellular markets in Europe. The consensus among analysts is that multi-bidders like Vodafone are expected to face a bill of about œ20 billion.
Added to this œ20 billion bill is the additional cost of building out third generation networks - a cost that some analysts think could be as much as the cost of the licences themselves.
At a cost of anything up to œ40 billion, there is no doubt that the sums involved are huge, and the market is rightly concerned about the amount of debt Vodafone will acculumate to pay for these licences. The company is currently in the capital markets raising a $5 billion jumbo loan to pay for the UK licence from a group of 15 banks. This loan is in addition to an existing 17 billion euro loan it has outstanding which funded its acquisition of Mannesmann.
But the clear majority of City analysts do not feel that the debt burden will be too big to bear. Firstly, they expect Vodafone to reduce its debt leverage through a series of disposals. The sale of Orange is the most pressing, and analysts expect it to fetch at least œ30 billion, which should substantially help reduce Vodafone's debt burden and pay for its UMTS licence blitz.
Vodafone can also count on some cash from the sale of some Mannesmann assets. For instance the sale of Mannesmann's engineering assets is expected to fetch a further œ6 billion. Vodafone also has the option of selling Mannnesmann's fixed line business which could fetch further tens of billions (although when Vodafone originally took over Mannesmann it stated an intention to keep the fixed line business).
Simple mathematics would suggest that the asset sales will come close to paying for Vodafone's 3G outlay. The company and most analysts remain convinced that this balance between 3G costs and asset sales ensures that the company has an extremely bright future.
The company aims to replicate its success in the UK market, where it remains the largest and most profitable cellular operator with a subscriber market share of 33%. The company now has more than 8.8 million UK subscribers of which 57% are prepaid users. And while it will clearly have to strengthen its presence in other areas, such as its GSM markets by launching a wireless data platform to claim its share of the Internet revenue potential, it is well positioned to do so on a sensible financial basis.
According to Warburg Dillon Read, Vodafone's cash flow is forecast to be œ1.1 billion in the year to March 2002, a figure which will be substantially boosted by the sale of the aforementioned subsidiaries. Furthermore, Warburg points out, Vodafone will also benefit from considerable economies of scale in 3G equipment purchasing relative to its peers. So, despite Vodafone's large capital expenditure bill from its UMTS licence spending, it remains the best placed operator to fund this move and benefit from the explosion in wireless communication. |
