The changing of the guard

IT'S BEEN a hectic week in the telecoms world. On Thursday it emerged that BT and Cable & Wireless had re-opened merger talks that could create Britain's biggest company. The news sent shares in both companies soaring.

A day earlier mobile telephone-operator Orange made a sparkling stock market debut, closing at a near 16 per cent premium to the 205p offer price.

But the biggest gains in the sector were recorded by Securicor, the security- to-parcel delivery group and owner of a minority 40 per cent stake in the mobile phone group Cellnet.

Confirmation of plans to simplify its antiquated capital structure by unifying the capital and operating structure of the group received a warm welcome from investors, who pushed the more widely-traded A class of shares up from 988p to well over 1200p by the close of play on Friday. "The restructuring removes Securicor from the basket-case of special situations," was the verdict from NatWest analyst Katie Still.

The long-awaited move increases liquidity in the stock and could pave the way for a full takeover bid for the group. By resolving knotty tax problems, it should also accelerate the sale of the Cellnet stake, which analysts believe is worth more than the entire stock market value of the "new" Securicor after the restructuring.

Such valuation anomalies are not uncommon in the sector: at times Cable & Wireless has been worth less than the implied value of its 57.5 per cent stake in Hong Kong Telecom.

Securicor has clearly come a long way since its former parent company began life as Associated Hotels in 1923. Securicor itself grew out of a small guarding company formed in 1935 when two wealthy friends - the Marquis of Willingdon and Henry Tiarks - devised a scheme for bicycling guards dressed in ex-police uniforms to pedal between large residential homes in London to deter burglaries. Worried by the growth of private armies, the new company was attacked by veteran Labour pacifist, George Lansbury, who called it "the first halting step down the road to fascism".

After the war the founders toyed with the idea of reviving the company as "The Security Corps" but the authorities deemed that too official and too military. The verbal amalgam, Securicor, was chosen instead.

Today Securicor still acts as a magnet for retired police chiefs, ex- military types and well-connected financiers. The current board of directors includes Sir Peter Imbert, former Commissioner of the Metropolitan Police.

Perhaps the company's most inspired decision was to invest pounds 4m in the Cellnet joint venture with BT back in 1984. True, Securicor has never exercised any management control over Cellnet, but the network has come to dominate the group, chipping in pre-tax profits of pounds 70.6m out of a total of pounds 99.4m in the year to September 1995.

Unlocking the hidden value that lies in the Cellnet stake, and thereby rebalancing the company, is the key to valuing Securicor's shares.

Last year BT tried to take full control of Cellnet, but the move was blocked by the Government. Other telecoms groups have also expressed an interest in Securicor's stake. Finance director Christopher Shirtcliffe says no talks are currently taking place, though the situation is under constant review.

Much depends on the outcome of the BT/Cable & Wireless talks. If a merger does go ahead, C&W would probably have to sell its Mercury Communications subsidiary, and its 50 per cent holding in mobile phone-operator, Mercury One-2-One, to avoid running into regulatory problems.

That risks a glut of stakes in mobile phone-operators coming on to the market at once, which could, in time, drive down selling prices. BT may also be too pre-occupied with C&W for the time being to revive talks with Securicor about Cellnet.

But with its digital network now covering most of the country - unlike One-2-One, whose service is still being rolled out beyond Greater London - the importance of Cellnet to BT is unlikely to diminish.

In valuation terms, Securicor's Cellnet stake now has an implied worth of $108 per head of population in the network area against a fair value estimate of $120 per head, according to NatWest. That implies a price target of about 1400p, suggesting the high-flying shares have further to run.