Personal Business: INVESTING
GETTING A LINE ON EUROPE'S TELECOM FREE-FOR-ALL
If you're hoping to cash in on the global telecommunications revolution, there's no need to scour Brazil for cellular-phone investments in the rain forest. The real action these days is in Western Europe, where a wave of privatizations is creating huge opportunities for cautious and risk-loving investors alike.
In the coming year, an astounding $30 billion worth of telecom stock offerings will hit the European market. Most of them will probably be sold as American depositary receipts (ADRs)--instruments traded in the U.S. that represent ownership of foreign shares. And Italy's STET, Spain's Telefnica de Espaa, and the Netherlands' KPN, all of which have shares already trading in Europe and the U.S., each plan to sell more stock later this year. Then will come the mother of all privatizations: Germany's Deutsche Telekom, which is expected to raise $10 billion when it is sold on global markets in early 1996.
Driving the push to privatization is the European Union's plan to open most countries up to competition on Jan. 1, 1998. Analysts think that will turn sluggish state monopolies into a hard-charging bunch of European Baby Bells that will quickly go for new markets and greater efficiency. And while Europe already boasts high phone penetration, customers there use their network half as intensively as Americans do, meaning there's room to grow.
The risk is that too many shares will be hitting the market at once. "There's going to be a lot of paper in one industry for investors to absorb," says Mark Breedon, portfolio manager of the New York Stock Exchange-listed Global Privatization Fund. Breedon thinks that is bound to put pressure on telecom stock prices. But there's little sign of that at the moment.
The latest entrant to the privatization rush is Portugal Telecom, which went public June 1 via a $900 million sale in Europe and the U.S. Portugal Telecom ADRs are already fetching a $1 premium over their $18.72 offering price. Another recently privatized carrier, Tele Danmark, is also making gains. After rallying sharply after their initial sale in 1994, the Danish phone company's ADRs fell back toward their $23.53 offering price--only to rise to $29 in early June. Now, Morgan Stanley & Co. analyst Richard Jones is counting on a further recovery. He reasons that Tele Danmark has plenty of cash and is better protected than most European telcos against challengers because of its tough cost controls, hard-nosed managers, and low domestic rates. Jones also thinks the company has a shot at winning this month's auction for a 27% stake in the Czech Republic's SPT Telecom.
BIG-BOARD BOOST? For less conservative investors, Swiss Bank's head of global telecoms research, Richard Ryder, prefers "red-hot" Telecom Italia, which trades only in Europe. Telecom Italia plans to spin off its mobile business to existing shareholders on July 17, which Ryder figures could boost the combined value of both companies by 25%. Because it owns 57.7% of Telecom Italia's shares, Italy's other phone company, STET, also could benefit from the split-up. STET's upcoming move from the U.S. over-the-counter market to the Big Board in coming weeks could also push its shares up.
Cellular stocks in Britain are stirring investors' interest, too. Oscar Castro, portfolio manager of the San Francisco-based Montgomery Global Communications Fund, describes himself as "fanatical" about wireless growth prospects in the Old World, where cellular penetration trails that of the U.S. His favorite play: Vodafone, the leading British cellular operator with other interests in Germany, Australia, and South Africa.
British Telecommunications also has its hand in cellular, owning 60% of the country's No.2 cellular operator, Cellnet. British regulators recently barred BT from buying the 40% of Cellnet owned by Securicor, a communications and armored-truck group. If the ban is lifted, NatWest Securities' Mark Lambert reckons a BT buyout could boost Securicor's share price by at least 50%.
MERCURY DROP. BT also figures in takeover talk swirling around its cross-town rival, Cable & Wireless PLC. C&W, which owns 57.5% of Hong Kong Telecommunications Ltd. as well as an 80% stake in Mercury Communications Ltd., Britain's No.2 carrier, has long been viewed as prime takeover bait, since the sum of its parts trades below its estimated breakup value. Mercury's recent disappointing results have revived rumors that AT&T might be interested in buying the British unit. BT, meanwhile, could make a play for C&W's far-flung foreign holdings.
The action in deregulated Britain is spilling over into Germany, where competition-hardened challengers such as BT and C&W are lining up to battle inefficient Deutsche Telekom on its home turf. John Tysoe, an analyst with London broker Societe Generale Strauss Turnbull, advises investors to be wary of the initial offering until the German government has worked out a host of regulatory questions that will affect rates and profitability. But not to worry: There's no shortage of investment possibilities elsewhere in Europe. The hard part is sorting through them all.
A Heavy Menu of Telecom Stock Sales
Companies with stock offerings in 1995 and 1996
COMPANY ESTIMATED VALUE
OF OFFERING BILLIONS
STET (ITALY) 7.0
KPN (NETHERLANDS) 5.5
TELEFONICA DE ESPANA (SPAIN) 1.5
MATAV (HUNGARY) 1.0
U.K. CABLE (BRITAIN) 1.0
DATA: BZW RESEARCH
New Numbers for Europe's Phone Plays
BRITISH TELECOM Cellular-phone action $64
(BRITAIN) is heating up
CABLE & WIRELESS Global reach, but a
(BRITAIN) dull stock 20
TELE DANMARK Recently privatized, 29
(DENMARK) rich dividend
STET (ITALY) Government to sell 29
VODAFONE (BRITAIN) Global cellular 33
*Per American depositary receipt, June 5
DATA: BLOOMBERG FINANCIAL MARKETS, BWEDITED BY AMY DUNKIN Julia Flynn and William Glasgall