Cellnet mystery deepens

THE INVESTMENT COLUMN

The decision by the Department of Trade and Industry to prevent BT buying Securicor's 40 per cent minority in Cellnet, far from shutting the door, actually seems to have brought a restructuring of the mobile phone company's ownership closer.

The ambiguity of the government statement suggests that the door is still very much open to a BT offer, if no one else comes forward. But even if that is not possible, Securicor has finally come off the fence - it is tired of having no control over its big profit earner, and the Cellnet stake is up for sale.

It is not immediately apparent why the DTI should want to block the sale, given that the original ban was designed to prevent BT from dominating the nascent mobile market. With four strong players battling for share, there is now little worry of that happening.

But the decision does rekindle questions about the valuation of Securicor, which for years has been dominated by Cellnet's fast-growing profits.

As with Cable & Wireless, whose stake in Hongkong Telecom is sometimes valued at more than its parent, some analysts argue that the sum of Securicor's parts is worth a great deal more than its whole.

The trouble is that, unlike Hongkong Telecom, which is a publicly quoted company, valuing Cellnet is more art than science, and the large number of variables creates a sizeable range for the company's possible worth.

One approach is to compare Cellnet with Vodafone, its closest rival in the UK mobile market and easily valued because it, too, is quoted.

Doing that puts a relatively high value on Cellnet, but analysts argue about the extent to which that price should be discounted thanks to Cellnet's historical reliance on non-business users, who tend to be less profitable.

Cellnet has tended to lag behind Vodafone in terms of quality and breadth of service, which has made it less attractive to high-spending business customers. That has been important because these few users tend to provide the bulk of revenues and they tend to stay loyal to the operator they first choose.

If the sale is to a third party, a further discount has to be factored in to account for the buyer ending up as BT's junior partner. Clearly, the stake is worth more to BT than to anyone else.

Other complications include the extent to which capital gains tax will reduce the proceeds to Securicor and whether or not that could be avoided by staging some sort of demerger and handing shares in Cellnet directly to Securicor shareholders.

Taking all those factors into account, analysts were yesterday plumping for a value for the 40 per cent stake of between pounds 1.2bn and pounds 1.6bn. Taking the conservative end of the range values Cellnet at 880p a share to Securicor shareholders, and adding in the rest of the business creates a sum-of- parts valuation of about 1,130p a share. Securicor's most widely traded 'A' shares closed 7p lower at 1,000p yesterday, suggesting a discount of about a tenth to a prudent notional break-up value. Given the uncertainty, and the likely delay before the Cellnet value is realised, that is reasonable, but the downside seems limited.

Holidays 'war' is going nowhere

High-street travel agents should enjoy brisk trading today following the travel industry's latest bout of price-cutting. Lunn Poly set the ball rolling last week by knocking pounds 100 off selected June holidays. This week has seen Thomas Cook and Going Places follow suit with special deals of their own.

While this is good news for consumers able to slip away on holiday at short notice, investors may worry about the potential impact of an all- out price war on the sector's quoted companies - Airtours, First Choice, Inspirations and Eurocamp. They probably shouldn't.

A holiday "price war" has become almost an annual event owing more to hype than substance. A few headline-grabbing "bargains" is a clever marketing ploy to draw sun-seeking holidaymakers into the shops.

The prices are being cut, however, on brochure holidays, where the operators still make a margin, rather than the cheaper late deals where the operators are already making next to nothing.

It is true that the travel industry is having a tough year, but most analysts feel the main travel groups are handling the conditions better than last year. In 1994, strong holiday sales in January and February lured tour operators into adding capacity.

When demand petered out, they had to cut prices to shift unsold holidays. This year, the reverse is the case. A slow start has picked up in April and May. Stats MR, which monitors the industry, shows holiday sales in April up 1 per cent on last year.

True, the sector was over-optimistic in forecasting 5 per cent growth in bookings this year, as 2 per cent will be closer to the mark - weak consumer confidence has affected demand. But tour operators are unlikely to be left with brochure-loads of unsold holidays.

Of the quoted groups, it is probably the larger players that are best- placed to ride out any turbulence. That means Airtours, which has a market share of 19 per cent behind the unquoted Thomson with 30 per cent, and First Choice, which lies third with 11 per cent.

Tellingly, the City was philosophical about the price cuts. Airtours shares remained unchanged at 439p and First Choice finished just 2p down at 121p.

Brokers are leaving their forecasts for both unchanged, with BZW expecting pounds 82m from Airtours and pounds 34m from First Choice. Both are at a substantial discount to the market, with Airtours on a forward rating of 10 and First Choice at 11. That will be worth a look when the summer silly season has run its course.