Article on VOD. Note section on VOD global brand importance. Supports Valueman speculation about VOD possible interest in G*
worldlyinvestor.com
A Tale of Two Winners
March 19, 1999 7:52 AM EST
By Emily Burg
Correspondent
If you're looking to make a play on the
booming international trend in wireless
services and growth in cellular penetration,
look across the Atlantic to England for
inspiration.
The ADRs of British wireless companies
Vodafone (quote, chart, profile) and Orange
(quote, chart, profile) have been performing
very well over the past few months. Both
companies have been reporting double-digit
growth thanks to the vibrancy of the British
cellular business.
This past quarter was the best ever for cellular
subscription growth in the UK, with 2.5 million
new subscriptions. Overall cellular penetration
in the UK grew to 20%. However, UK cellular
penetration still falls below the European
Union average of 24%.
Telecom analysts are bullish about England's
ability to catch up with its continental
neighbors, predicting an additional two million
new subscriptions in 1999, which will bring
total penetration to 70% by 2004.
Both Vodafone's and Orange's stocks have
benefited from this growth, and both stocks
grace analysts' "buy" lists.
Still, given a choice, most analysts prefer
Vodafone to Orange. While both stocks are
well liked because of the industry's huge
growth prospects, Vodafone is clearly the
stronger of the two. Its lucrative international
ventures, a market leading position at home,
and the recent acquisition of AirTouch (quote,
chart, profile) make Vodafone a winner.
"The Word Is Vodafone"
Vodafone is the UK's number one cellular
service provider. It has a 37% market share,
almost 5 million customers, and one million
customers more than its closest competitor
Cellnet, British Telecom's (quote, chart,
profile) cellular operation.
The company reported year on year growth of
50%, with almost one million new subscribers
for the fourth quarter of 1998. Vodafone's
EBITDA growth is 15%, leading Merrill Lynch
analysts to give it a price target of $247.50.
"We regard Vodafone as both a core cellular
and core telecoms investment," wrote Merrill
Lynch analysts in a report on the stock.
Vodafone has 5 million international
customers, the result of joint ventures and
exclusive licensing deals in Egypt, France,
Greece, the Netherlands and New Zealand.
The AirTouch deal, a coup for Vodafone, will
give the company exposure to a total of 23
international markets, including the
increasingly contested US market, and a
subscriber base of 23 million.
More specifically, the AirTouch deal will help
Vodafone round out their pan-European
holdings by giving them a share of AirTouch's
ventures in Germany, Italy and Spain.
"The AirTouch acquisition will create a
'must-have' stock with excellent fundamental
prospects and ownership tensions," wrote
Merrill Lynch analysts when the deal was
announced.
One analyst who spoke to worldlyinvestor.com
on the condition of anonymity said that
another benefit of the deal would be that the
new company "will be in a stronger position to
build a global brand." A final point in
Vodafone's favor is that despite its high share
price, currently around $174, analysts
consider Vodafone undervalued, based on its
extensive international portfolio.
Pulp Fact
Orange is the newest entrant to the UK
market. It was granted its license in 1993,
nine years after Vodafone was awarded its
license.
"Orange did a fantastic job building up their
UK network," the telecoms analyst told
worldlyinvestor.com.
The strides that Orange has made in the UK
market, reporting an 80% increase in
subscriptions for 1998 and a whopping
three-fold increase in EBITDA earnings,
portend a juicy future for Orange in England.
But their comparatively paltry international
ventures detract from analysts' expectations
for the company. Although Orange has stakes
in mobile operations in France, Germany and
Switzerland, and has licenses to operate in
Austria and Belgium, with Dutch partner KPN
(quote, chart, profile), analysts think that
Orange still needs to grow its international
holdings.
But analysts recommend Orange in spite of
the fact that its share price and UK market
share are half of Vodafone's. Merrill Lynch has
given it a price target of $98.
What Orange has going for it is exactly what it
has working against it. The fact that Orange is
a tertiary player in its home market with
limited international holdings could be seen as
good value for a stronger, more established
European telecom looking to beef up its
international portfolio.
"In the game of European cellular
consolidation, sooner or later Orange will get
caught up as an acquireree," said the telecom
analyst.
He said that AirTouch could have been a likely
candidate to purchase Orange, but now that
AirTouch has gotten into bed with Vodafone,
perhaps Italy's Telecom Italia Mobile (quote,
chart, profile) or Olivetti (quote, chart, profile),
or Germany's Mannesmann (quote, chart,
profile) might make a bid for Orange.
Analysts at Merrill Lynch agree. "Orange
could assume an interesting role in the
potential future consolidation of the industry,"
they wrote.
Given the drama playing itself out in Italy
between Telecom Italia and Olivetti, analysts
have little doubt that further consolidation is on
the way.
It looks like going with either of these British
wireless companies will be a win-win situation
for investors.
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