Vodafone deal sparks doubts

...but takeover receives good reviews from most in the City

IN THE wake of its pounds 37bn takeover of US rival AirTouch Friday night, Vodafone, Britain's largest mobile phone company, this week faces a fusillade of questions from investors and analysts who applaud the deal, but worry about its impact on the company's earnings.

"Vodafone will have a market capitalisation bigger than that of BT, it will generate 30 per cent annual earnings growth, and it will be a giant in the industry in terms of its international reach and potential to develop even more markets," said Henderson Crosthwaite analyst Chris Godsmark yesterday.

But a second telecoms analyst working for a US bank argued that the hit to earnings Vodafone will take because the deal was structured as a takeover rather than a merger will be massive.

"Vodafone is buying AirTouch for pounds 37bn," the analyst said. "AirTouch has only pounds 5.5bn in fixed assets. That means writing off pounds 31bn of goodwill over 20 years. I reckon that will dilute pre-tax earnings in the year to March 31, 1999 from about pounds 1.8bn to pounds 300m."

Despite such concerns even the most sceptical analysts gave the deal a thumbs-up. It makes Vodafone the largest mobile phone company in the world. Analysts will this week seek answers from chief executive Christopher Gent and the new company chairman, former AirTouch chief executive Sam Ginn on the company's strategy for Europe and the US.

"Together, they have the second [largest mobile phone operation] in almost every European country, with 20 - 30 per cent of the market," said Andrew Webber, a telecoms analyst at management consultants Arthur D Little.

The task will be to leverage this coverage into more profits. "One way to do it will be to offer Vodafone customers in one country preferential rates when they ring Vodafone customers in another country," said an analyst.

The bigger challenge, however, will be in the US, where mobile phone penetration stands at a relatively static 25 per cent. "If they can change the US business into a fast-growing one," said Godsmark, "that will deliver tremendous value to shareholders."

The rate of growth in mobile phone use worldwide is phenomenal. During the first nine months of 1998 23.2m net additional cellular subscribers signed up in Europe alone, compared with 12.4m in same period of 1997, according to Salomon Smith Barney.

Mobile phones are destined to become the equivalent of hand-held personal computers. When they do, Vodafone will be well positioned to strike deals with media companies seeking to sell information and entertainment services to mobile phone users.

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