Sonera's Value Is Sum of Its Parts

Suzanne Kapner

LONDON -- For a mobile-phone operator that lacks the economic might to compete for the third-generation mobile phone licenses that some governments are auctioning off, Sonera (SNRA Quote) looks pretty expensive. Yet, the Finnish company's valuation has more to do with what Sonera is becoming -- a provider of services for next-generation wireless phones -- than what the mobile-phone operator has been.

On Monday, Sonera's shares were trading at 59 euros ($53), which places the company at 119 times trailing earnings -- a valuation richer than even that of the king of the wireless world, Vodafone AirTouch (VOD Quote). Yet if James Enck, an analyst with Credit Lyonnaise, had his way, Sonera's shares would be even richer. His 12-month target is 84 euros, and he rates the stock a buy. (His firm hasn't performed any recent underwriting for Sonera.)

Peaks and Valleys Sonera shares are well off their highs

Enck's bullish stance stems, in part, from two young, but fast-growing divisions within Sonera: Zed, a wireless portal, and SmartTrust, which provides security for mobile commerce. The value of these two divisions could soon be unlocked either through a partnership with a major mobile player or initial public offerings. Add in Sonera's stake in a Turkish cellular company, which is also about to go public, as well as its investments in the U.S., and the stock begins to look like a bargain.

"The reason I like Sonera," says Leonard Geiger, co-manager of U.S. Trust's (umpnx Quote)Excelsior Pan-European fund which owns the shares, "is that you can buy a company with good, safe cash flow from its cellular business" and still get cutting-edge technology from Zed and SmartTrust with less risk than buying, say, a Baltimore Technologies (BALTV Quote).

Baltimore Technologies, a provider of wireless security solutions, is not expected to break even until at least 2002, while Sonera's earnings are expected to nearly double over the next two years to 701 million euros, or 97 cents a share.

Over that time period, most of Sonera's profits will continue to come from its mobile operating business since Zed and SmartTrust aren't expected to break even for two years. However, those nascent divisions are already gathering steam. In 1999, nearly one-third of Sonera's 1.8 billion euros in revenue came from Zed and SmartTrust, compared with 24% from cellular.

A Thicker Slice for Web Services Sonera's 1999 sales by division

Source: Credit Lyonnais Securities Europe

Those mobile services operations make Sonera an attractive acquisition candidate, Geiger argues. "All the incumbents are trying to create a pan-European footprint," he says. "Any of the major players would be interested in partnering with Sonera."

Enck, the analyst, echoes that sentiment when he notes in a recent report that Zed and SmartTrust "may tempt a predator interested in buying in, rather than developing, mobile Internet expertise."

Recent market rumors put Vodafone in a link-up with Sonera -- a possibility that both companies denied to TheStreet.com.

"Sonera isn't negotiating with Vodafone about any deal at this time," says Jari Jaakkola, executive vice president of investor relations for Sonera.

Although declining to comment on the speculation, a Vodafone spokesman says the company is pursing its strategy to build a portal, rather than buy one, through its joint venture with French communications company Vivendi (VVDIY Quote).

That would place Vodafone in the position of playing catch-up when the European part of its joint venture portal launches this summer. By then, Zed, Sonera's portal, will have been running for a year. In Finland alone, where Sonera has 60% of the mobile-phone market, Jaakkola estimates that 700,000 people use Zed each month.

The possibility of a hook-up between Sonera and a major mobile player, while tantalizing, is only one part of the story. Should the company remain independent, Sonera says it plans to sell shares in Zed and SmartTrust to the public within the next 12 months. Those offerings could be worth an additional 7.5 billion euros above the current value implied in the company's stock price, Enck calculates.

Then there's Turkcell, a Turkish global system for mobile, or GSM, operator. Sonera has a 41% stake and plans to sell it to the public within the next two months. Enck estimates that Sonera's holding in Turkcell could be worth 14 billion euros, or almost double its implied value.

In the U.S., Sonera also has been busy making investments, unlike many European incumbents who've found it difficult to break into the region. Sonera has an 8% stake in VoiceStream Wireless (VSTR Quote), which recently bought Aerial Communications, as well as a 9.1% stake in Powertel (PTEL Quote).

"Sonera has over the past year gained a significant place at the table for the eventual roll-up of the fast-growing North American GSM market," Enck noted in his report.

That placement, Jaakkola points out, assures Sonera a platform to roll out its Zed and SmartTrust services. And it's the type of connection that's likely to ring home, not just with investors, but also with Sonera's larger competitors.

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