IBD. Vodafone's Quest Begins With AirTouch Alliance
Date: 6/8/99
Author: Reinhardt Krause
It takes oodles of cash to become a global wireless phone giant. And
Vodafone Group PLC Chief Executive Chris Gent is just the guy to spend
it.
He's the architect of the pricey purchase of AirTouch Communications Inc.
The approximately $60 billion merger - the wireless industry's largest by far
- is expected to close this month.
But Gent's quest has just begun.
The CEO wants his British firm to buy, or boost its stakes in, more cell
phone operators worldwide. He wants to build more advanced networks
to let mobile phone users easily surf the Internet. He wants to add to
AirTouch's U.S. cell phone subscriber base.
Such grand plans take money. Vodafone already has borrowed $10 billion
to finance its cash and stock purchase of AirTouch. It doesn't expect to
post a pretax profit for three years as it digests that cost.
Not to worry, Gent says. With more than 23 million wireless customers, the
combined firm will be the industry's dominant player, he says.
To finance more deals, Gent points to that size as well as to Vodafone's
strong credit ratings, which would let it issue bonds if need be.
''We'll be generating $5 billion to $6 billion in (operating) cash flow, and
we'll have massive opportunity,'' Gent said. ''We'll invest in any geographic
area where we can get a decent return.''
Newbury, England-based Vodafone awaits only the green light from U.S.
regulators before closing the AirTouch purchase. The European Union
approved the deal in late May. Both sets of shareholders have OK'd the
merger as well.
Vodafone outbid Bell Atlantic Corp. for AirTouch, which has 7.4 million
U.S. subscribers. The regional Bell wanted AirTouch, spun off from Pacific
Telesis Group in 1993, to expand in the U.S.
A desire to enter, and grow in, the U.S. market was a Vodafone goal, too.
But the British company also craved AirTouch's overseas properties.
AirTouch owns part of wireless carriers in Europe and Asia, including
Japan and South Korea. That complements Vodafone's holdings in Europe,
the Middle East and Africa. Together, Vodafone-AirTouch lacks a
presence only in South America.
''We'll have a worldwide position,'' Gent said. ''The best wireless assets in
the world are owned by Vodafone and AirTouch, and we're putting them
together.''
Investors like Gent's vision. Vodafone's U.S. shares, or American
depositary receipts, have risen from a close of 176 on Jan. 15, the trading
day before the AirTouch purchase was revealed, to about 205. Shares
have risen in the last two days because analysts expect the company to
have a good earnings report on Tuesday.
The two companies combined have operations in 23 countries and a
market capitalization of about $115 billion. That's higher than such
companies as Bell Atlantic and SBC Communications Inc. For the year
ended March 31, the firm would have pro-forma revenue of more than
$9.9 billion. That's huge for a wireless company but far below, say, SBC or
Bell Atlantic.
Vodafone's biggest strength would be a European network that rivals will
struggle to match.
Still, analysts say Vodafone faces challenges. For one, the two firms'
wireless networks aren't totally in sync. Vodafone and AirTouch use the
Groupe Speciale mobile communications standard in Europe and Asia. But
in the U.S., AirTouch uses a different technology called code division
multiple access.
''One question is whether they can leverage AirTouch's U.S. footprint to
make Vodafone stronger in Europe,'' said Matt Hoffman, an analyst at
market researcher Dataquest Inc.
Gent admits that's a concern. He's counting on the next generation of
mobile networks, called 3G, to work over both GSM and CDMA. The
U.S., though, will lag Europe and Japan in rolling out 3G systems.
Gent says chips built into cell phones can bridge the technical gap, too.
''All you have to do is go to (cell phone maker) Nokia with a big enough
order and they'll say thanks very much,'' Gent said.
Vodafone faces another U.S. hurdle, analysts say. It must forge a roaming
pact with Bell Atlantic. Roaming lets subscribers who travel make calls
outside their normal service area.
''Vodafone needs to secure a sufficiently extensive footprint to compete
with the likes of Sprint PCS and AT&T,'' said Mark Lambert, a
London-based analyst at Merrill Lynch & Co.
Whether Bell Atlantic and Vodafone-AirTouch can mend fences remains to
be seen.
After losing AirTouch, Bell Atlantic said it would dissolve PrimeCo
Personal Communications LP, a joint venture with AirTouch. PrimeCo has
signed up more than 1 million subscribers since starting out in 1997. How
PrimeCo's assets would be distributed is unclear.
Gent expects to forge a pact with Bell Atlantic. ''It's the sensible thing to
do,'' he said. ''With the assets we control, it would be in their commercial
interests to partner with us.''
Bell Atlantic, which is buying GTE Corp., made a move in April that could
boost its negotiating position. GTE said it would buy half of Ameritech
Corp.'s cell phone properties for $3.27 billion in cash.
Analysts say the move was done in part to pressure Vodafone, which GTE
Chief Executive Charles Lee denies.
''(Ameritech's) are good cellular properties that complement ours. It's not
leverage on anybody,'' Lee said. ''We'll work out what we have to with
AirTouch and Vodafone.''
In Europe and elsewhere, analysts say Vodafone-AirTouch would like to
raise its holdings in joint ventures to obtain operating control.
To approve the merger, Vodafone agreed with the EU's request that it shed
its 17.2% stake in E-Plus Mobilefunk GmbH, the third-biggest German
mobile phone operator.
AirTouch is a minority partner with Mannesmann AG in the second-
biggest carrier in Germany. But that's not enough, analysts say.
''They (Vodafone) don't have sufficient control in places like Italy, France
and Germany,'' said Merrill Lynch's Lambert.
(C) Copyright 1999 Investors Business Daily, Inc.
Metadata: VOD ATI BEL SBC |
