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The Anglo File: One2One's Growing Market Share Makes It Ripe for Takeover

With Deutsche Telekom reportedly ready to bid $16 billion, One2One must remain a key U.K. player in mobile phones.
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The scramble to buy


, the U.K.'s fourth-largest mobile phone operator, shows just how much a presence in the British cellular market is worth. Or at least, how much

Deutsche Telekom

(DT) - Get Dynatrace Inc. Report

seems to think it's worth.

In March, the partners that own One2One --

Cable & Wireless





-- announced they had hired

Merrill Lynch

, the huge American investment bank, to explore strategic possibilities for the venture. A floatation was mooted, but as the bids from various parties began streaming in it became apparent an outright sale would be the preferred choice.

One2One was initially thought to be worth between $8 billion and $12 billion, but Deutsche Telekom has apparently put in a bid that values the mobile operator at around $16 billion. While DT refuses to comment on its reported interest in One2One, the telecoms giant will raise about $11 billion in June (in part for overseas acquisitions) even as it deals with European authorities about its proposed merger with

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Telecom Italia


The German company isn't alone in its aspirations of owning One2One. Other interested parties include



France Telecom






One Plus One Equals Three

So what makes One2One so valuable? Although the smallest of the U.K.'s cellular operators, it is managing to increase its market share of a booming sector in the U.K.

U.K. cellular operators added a record 1.9 million new mobile users during the first quarter of this year, which was significantly more than the 562,000 subscribers added in the same period last year. This means the penetration level in the U.K. has now reached 26% of the population, compared with 16% a year ago and 22% only three months ago.

During the first quarter, One2One added 329,000 new users, bringing its subscriber base to 2.3 million and its total market share to 15%, up from 13% a year ago.

According to figures obtained from MediaOne by


, a Swedish investment bank, One2One had sales in 1998 of $1.2 billion, up 58% from the year before. EBITDA in the year was $76 million vs. $96 million in 1997.

Assuming a price of $16.3 billion, Fredrik Danielsson, an analyst at Carnegie, says this would imply an equity price of $7,240 per subscriber, a multiple of 13.5 times sales in 1998 and 214 times EBITDA in 1998.

By comparison,



, the U.K.'s third-largest mobile operator, has an equity price of $5,360 per subscriber and is trading at only seven times its 1998 sales.


(VOD) - Get Vodafone Group Plc Report

, by far the largest of the U.K.'s mobile firms, has a price of $9,826 per subscriber and is trading at 13.6 times last year's sales.

A Bid Too Far?

Is One2One looking expensive? Certainly, at least when compared to mobile phone companies in more mature markets, like Sweden, where the cell phone penetration rate is nearly double that of the U.K., says Danielsson.

Although it can be argued that One2One justifies a similar sales multiple to Vodaphone because it is increasing its market share and is growing at a faster rate than the other British operators, a breakdown of the subscriber base reveals some worrying trends.

One2One's customer growth in the first quarter was overwhelmingly dominated by prepaid customers, who tend to be the less affluent segment of the population. Inevitably, this type of subscriber spends less on phone calls, which negatively impacts average revenue per user, or ARPU.

Of One2One's 329,000 new users, about 295,000 were prepaid, meaning that these customers now account for 42% of its subscriber base, up from 8% a year ago. By comparison, prepaid makes up only 33% of Vodaphone's U.K. subscriber base, and 28% of Orange's.

Further, One2One has probably just touched off a price war in the industry by its announcement last month of a fresh round of tariff cuts. Before the announcement, One2One's prices were on average between 10% and 15% below those of its rivals, which was probably sustainable because of the premium such brand names as Vodaphone and Orange demand.

However, One2One's new tariffs mean its rates are now some 30% below the rest of the market, which is sure to prompt a reaction from its rivals and lead to corresponding decreases in ARPU and profits in the industry.

Ultimately, the value of any commodity depends on how much someone is willing to pay for it. Luckily, for Cable & Wireless and MediaOne, the main bidder is a company that thinks a merger with Telecom Italia is worth $80 billion.