Having a One2One with the market
News Analysis: The UK's fourth largest mobile phone company is up for flotation, if another telecom group doesn't buy it first
Thursday 25 March 1999
The sale, due to be launched before the end of this year, is likely to value One2One at anywhere between pounds 8bn and pounds 11bn, even though it is yet to make its first pre-tax profit and is the smallest of the UK's four cellular operators by some margin.
The decision to dispose of One2One follows the appointment of Graham Wallace as the new chief executive of Cable & Wireless and the takeover of MediaOne by the rival US cable group Comcast in a $60bn (pounds 37bn) stock deal.
Several telecoms groups, including Deutsche Telekom and Mannessmann Telekom of Germany, France Telecom and Bell Atlantic and SBC Communications of the US, are already being mooted as potential suitors. But analysts believe a flotation remains the more likely option.
That would almost certainly be the preference of the One2One management, given the freedom that a stock market listing would bring. But Tim Samples, the American managing director of One2One, refused to be drawn yesterday.
"I think we will have some say in the decision and we have spent a great deal of time with the banks acting for the two shareholders helping draw up the memorandum for sale. But at the end of the day I can't influence how C&W or MediaOne chose to manage their shareholders and they have an obligation to maximise shareholder value."
Nor did he stress a preference for a US or European owner, should One2One be sold to a trade buyer. "From my perspective, the support they give One2One is more important than where they come from. We are not going to change our strategy one iota."
That strategy, engraved on the company since it began operations in September 1993, has been to transform the mobile phone from a business tool into something with genuine mass-market appeal.
Its early efforts at undercutting the opposition - Cellnet and Vodafone - on price and targeting the consumer market were a disaster. It was also handicapped by the decision to restrict service to the London area.
One2One is still living with the costly legacy of its PersonalCall tariff which offered subscribers unlimited free off-peak calls at weekends and evenings. Stories abound about how some subscribers began using their One2One phones as baby alarms and how One2One now regularly attempts to buy subscribers out of these contracts by offering them thousands of pounds.
One2One says both stories are apocryphal but admits it did have problems in the early days with the network becoming clogged, particularly around some London tower blocks.
But its faith in the mass appeal of the mobile phone has paid off. There are now some 12 million subscribers - representing a penetration rate of 20 per cent - but that is generally expected to double in the next 12 to 18 months. By 2004, six in ten homes are forecast to have a mobile phone.
One2One's investment in the network - pounds 1.2bn so far with another pounds 600m to come taking its UK coverage up to 98 per cent - has also paid off. Subscriber numbers have more than doubled in the past 15 months to 2.2 million now.
Although the company made a pre-tax loss of pounds 228m in 1997-98 and will be loss-making this year, it expects to break even in 2000.
James Ross of the brokers ABNAmro, reckons One2One will overtake Orange in terms of market share before the end of this year and be making pre- tax profits of pounds 650m by 2002. He values the company at pounds 11bn.
One2One certainly has its growing band of admirers. Because its network has been built for high capacity it can handle two-and-a-half times the peak-hour calls of Orange or Cellnet. It has also captured some 650,000 pre-paid customers - the fastest growing segment of the UK mobile market.
The advertising campaign - featuring present-day celebrities such as Ian Wright and Chris Evans having a One2One with their heroes of the past - has also been a success. The advertising spend will increase from pounds 40m to pounds 50m this year.
Meanwhile, a full nationwide roll-out is expected this year of its One2One kiosks, following experiments in Nottingham, Blackpool, Canterbury and Bournemouth. This will give One2One a countrywide chain of retail outlets in addition to the "shops within shops" it operates in large stores, airports and railway stations.
At the same time, One2One is beginning to make inroads into the business market. Last year it launched a range of new tariffs under the Precept brand designed to appeal specifically to small business users. Among the features are fax and data facilities, free daytime local calls and 24- hour phone replacement.
One2One has also begun to close the gap with its bigger rivals in terms of revenues per customer. It says it earns pounds 40 a month from each contract customer and pounds 200 a year from pre-paid subscribers compared with pounds 41 and pounds 230 respectively for Orange.
But a market valuation of pounds 11bn would put it ahead of Orange which has 200,000 more customers. Chris Godsmark, of the brokers Henderson Crosthwaite, says: "It has a nice mix of customers and 50 per cent of its growth is coming from the more profitable contract customer segment of the market. But there is no way it is worth pounds 11bn. Our valuation is nearer pounds 7.5bn or pounds 8bn if you include its debt."
Mr Godsmark also points out that One2One faces the ever-present threat of a high-powered marketing blitz from the two dominant cellular operators, Vodafone and Cellnet - one reason why its growth in market share slowed in the second half of last year.
If the runaway success of Orange is anything to go by, none of this is going to stop investors piling in to One2One - unless C&W and MediaOne first get a trade offer they can't refuse.
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