The Anglo File: BT Buys Out Cellnet Ahead of Licensing Shift

The deal positions the telecom for the coming auction of UMTS licenses -- and the price is right.
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Tuesday was a pretty good day for

British Telecom

(BTY)

: The telco got its house in order before the U.K.'s auction for next-generation mobile-phone licenses, and at a very good price to boot.

BT announced on Tuesday it had agreed to terms with

Securicor Group

, the big British transport firm, to buy out the latter's 40% stake in their mobile-phone joint venture

Cellnet

. The U.K.'s second-largest mobile operator will now become a wholly owned subsidiary of BT.

The former monopoly is acquiring the stake in Cellnet for 3.15 billion pounds, giving the mobile-phone operator an implied enterprise valuation -- a measurement of equity plus debt -- of 8.5 billion pounds. That's a 35% discount to

Orange

(ORNGY)

, the U.K.'s third-largest mobile phone operator. By all accounts this is a very fair, if not cheap, price to pay. BT Cellnet has over 5 million subscribers, placing a value of 1,700 pounds on each one. Orange subscribers, by comparison, are valued at 4,400 pounds each.

It is tempting to conclude from this that Securicor needs a few lessons in hard negotiating. Perhaps not. Tressan MacCarthy, analyst at

Credit Lyonnais

, which has no banking relationship with BT, believes that because BT was the only bidder, a 20% to 30% discount is reasonable.

The recent history of sales for mobile-phone operators would also appear to advise against trying to involve as many bidders as possible.

The future of

One2One

, the U.K.'s fourth-largest mobile-phone operator, owned by

Cable & Wireless

(CWZ)

and

MediaOne

(UMG)

, is still in doubt after the financial advisors for the owners tried to push the price up too high and the bidders dropped out one by one. Cable & Wireless and MediaOne must now choose whether to reduce the price and entice one of the buyers back or else opt for a flotation of One2One instead.

The market was certainly favorable to the terms of the deal for both sides. BT's shares rose 6.3% to close on Tuesday at 1117 pence and Securicor ended 7.2% higher at 583.5 pence.

Charting a New Course
Share price of British Telecom year-to-date

The Next Generation

BT says it hopes to complete the acquisition in the last quarter of this year after getting approval from Securicor shareholders. This timetable means that BT would be well placed to use Cellnet as its vehicle for bidding for one of the five Universal Mobile Telecoms Service, or UMTS, licenses the government plans to begin auctioning later this year.

This auction process was certainly a catalyst for BT choosing now as the time to gain complete control over the mobile-phone operator. That BT will bid for, and be awarded, one of these UMTS licenses was never in doubt. What was open to question, however, was whether Securicor would be prepared to allow BT to use the Cellnet operation as its bidding tool.

Much of the planning for the auction of licenses has already been completed, but the thorny issue of roaming charges between the second- and third-generation networks remains to be decided.

The government wants to encourage as much competition as possible and so it is expected to favor a liberal, or cheap, roaming-charge structure. Needless to say the incumbents are keen to adopt a set of rules that protect the value of their existing cellular assets, so much so that One2One in June took the government to court over its proposed roaming structure.

Together with the capital expenditure involved in setting up a UMTS network, Securicor might have been forgiven for doubting whether next-generation phone services would actually generate the highest net present value for Cellnet, the most valuable asset in Securicor's portfolio.

Happily for BT all this is now a moot point and it can give itself a pat on the back for a good day's work. Investors are now hoping the telco can finish off the week in similarly grand style. It is expected to release its first-quarter earnings results on Thursday.