`Secret deal' charge dogs sale of Securicor's Cellnet stake to BT

News Analysis: Fund managers say mobile sell-off is too cheap at pounds 3.15bn
AS CITY workers lingered over lunch on a warm, sunny Friday afternoon in early July, Roger Wiggs, chief executive of Securicor placed a call to Sir Peter Bonfield, his counterpart at British Telecom.

Mr Wiggs got straight to the point: was BT interested in buying out Securicor's 40 per cent interest in Cellnet? Sir Peter quickly agreed that secret talks should begin immediately.

Nearly three weeks later, on 27 July, Sir Peter announced that an agreement had been struck to pay Securicor pounds 3.15bn for the Cellnet interest, giving BT 100 per cent ownership of Britain's second biggest mobile phone network.

Investors pushed up the share price of both companies in the hours after the deal was unveiled, but lately questions about the price and how it was reached have multiplied. Ultimately, this may threaten the ability of Mr Wiggs and Securicor's board to win the needed 75 per cent approval from shareholders who are to vote on the Cellnet stake sale at an extraordinary general meeting scheduled for 14 October.

Several institutions believe there is a secret partners' agreement governing how investment would be funded for the development of mobile services, relating in particular to acquiring a licence and launching third generation services early in the next century. "Our attitude ... is that we want to see that document and then make our decisions," says one fund manager, who declined to be named.

BT and Securicor refused to be drawn on whether such a document exists. Securicor declined comment ahead of the issuing of listing particulars, to be unveiled on 22 September, for a proposed new company to replace the existing one, should the Cellnet sale be approved.

As ever in the City, the big issue is price. That's despite the fact that Securicor is set to receive pounds 3.15bn for a mere pounds 4m investment in 1985.

If greed is the constant that colours any City player's judgement of value, it is still easy to see how some fund managers might believe that Securicor's 40 per cent Cellnet interest is being sold on the cheap. The sale price gives an implied value for all of Cellnet, which has more than 5 million users, of pounds 8.0bn.

That compares very poorly with the values of rivals as well as the price of recent deals in the mobile sector. Orange, with around 3 million customers, has a market capitalisation of pounds 13bn. Last month, Deutsche Telekom paid pounds 8.5bn for One2One, the country's smallest mobile operator. The perceived value shortfall has been aggressively highlighted by some American shareholders, notably, K Capital Partners. A spokesman for the privately held Massachusetts fund manager says the buyout values Cellnet customers at pounds 1,700 compared with the UK mobile sector average of pounds 3,500.

K Capital and some UK fund managers - including Standard Life and Perpetual, led by Martyn Arbib - also wonder whether Securicor management has an alternative agenda. In this scenario, Mr Wiggs and the company's board negotiated a quick exit from Cellnet to lay the groundwork for an acquisition, or to prepare for a management buyout of the rump company.

What seems undeniable is Securicor is massively undervalued. With a market capitalisation of pounds 3.5bn, the company's remaining distribution, security and communications service businesses are valued at only pounds 350m. That would seem a steal given pro forma annual sales of about pounds 1.2bn and operating profit of nearly pounds 50m. There is also plenty of cash on the balance sheet following the sale earlier this year of a half interest in Securicor's distribution arm to Deutsche Post for pounds 223.5m.

It appears that Securicor, sensitive to criticism, will be bending over backwards to pass the cash windfall from the Cellnet sale to shareholders. City analysts believe that as much as pounds 2.95bn - or nearly 95 per cent of the proceeds - will be distributed to shareholders in cash or via a BT loan note alternative.

Some veteran City observers, while acknowledging the Cellnet stake is probably worth more than pounds 3.15bn, point out that BT, as the controlling shareholder with its executives in all of Securicor's top management positions, was in a strong position to drive a tough bargain.

There is also a belief that some dissenting institutions may have arbitraged or gone overweight in Securicor shares, expecting the stock would eventually rise above 700p. However, since the deal, the stock has traded in a narrow band, closing down 2.5p yesterday at 586p.