Operators realize the value of their assets - Internet and mobile assets - Industry Trend or Event

CommunicationsWeek International, Dec 13, 1999 by David Molony

Spinning off Internet and mobile assets can maximize their value.

Venture capitalists and serial entrepreneurs are not the only ones tapping into the financial markets' demands for Internet-related stock.

Some telecoms companies--incumbents among them--are rewarding themselves for being in the sector already, by spinning off Internet businesses as public-listed companies. At the same time, they hope their newly exposed Internet assets will reflect back some limelight onto their core businesses.

Last month's initial public offering of shares in Internet service provider Terra Networks raised [epsilon]3.6 billion for Spain's national operator Telefonica. Moreover, since the parent company announced the flotation at the beginning of the summer, Telefonica's own shares have soared 40%.

In fact, Telefonica was not the first European incumbent operator to show Internet wares. A week earlier, Portugal Telecom sold shares in PT Multimedia Servicos de Telecomunicacoes e Multimedia SGPS, which immediately jumped to a 44% premium.

Others could follow (see chart), with Deutsche Telekom expected to lead the pack with T-Online, Europe's largest consumer ISP with 3.3 million subscribers. And Australia's Telstra this month reorganized its Internet businesses under the brand Telstra.com, possibly indicating a future market listing.

These companies are taking the first steps in a process that financial analysts dub "disaggregation." Their theory is that sprawling telecoms giants with diverse carrier, Internet and mobile telephony operations should float all or part of their many operations individually.

Each part will then be judged by investors, who could mark the shares higher than the starting price. If the theory holds, the combined market values of the separated businesses will exceed the market capitalization of the original consolidated company.

"There's not much doubt about the benefits," said Lawrence Askowitz, vice president, investment banking, at Credit Suisse First Boston Corp., New York. "It's just a question of which is the best way to go about it."

Some companies might want to raise as much cash as possible, as quickly as possible, with a 50%-100% divestment. But offering too much of a stake in a company to public investors may dilute the price.

Others will give investors a taster of their valuable assets with a 20%-30% issue: after all, they can always come back for more.

But there is a danger of giving away the game by spinning off valuable properties: Competitors may take advantage and snap up their rivals' floating businesses. Some analysts say it could even leave some divesting companies vulnerable to a bid from one of the newly created spinoffs.

Also, it may be difficult to separate businesses, particularly if it means removing a valuable asset from your bottom line.

"The Internet piece is a critical piece of the business to the telcos," said William Iselin, director of the London-based branch of investment bank ARC Associates, London. "Internet is a way to support top-line growth."

Carrying IP data traffic is fast-becoming the mainstay of many operators' business. On-line services, ISP management and consulting, and other services collectively called e-commerce, provide a front-end to the IP carrier business. But even data carriage produces different revenue streams locally and in the backbone, and that could make it harder for investors to work out what they are paying for.

"There's such a range of Internet assets," said Iselin. "All could have different values."

And while attention has focused on the Internet assets of big operators, wireless figures nearly as much in their plans. AT&T this month indicated it would issue tracking stock--separately listed stock--in AT&T Wireless Group in the United States. AT&T will sell stock representing 10%-15% of the wireless business, but the parent company keeps full management control of the subsidiary.

That model has worked well for AT&T's rival, Sprint. By issuing tracking stock in Sprint PCS, the parent has attracted investor capital for the wireless operation that it could not have raised from an issue of consolidated Sprint stock.

Meanwhile, in Europe Dutch operator KPN is considering floating off its mobile business.

But at a time when telecoms shares are leading stock markets around the world, some analysts wonder if telecoms companies have got their timing right. "The whole concept of disaggregation in telecoms companies is hugely complicated right now because of the trend to high valuations of telecoms stocks generally," said Iselin.

In other words, there seems little logic in trying to unlock hidden value if the market can see it already. Better timing would be to spin off assets when the parent company's own stock is low, or when the share price is less than net asset value.

In recent months, U.S. telecoms companies have spun off Internet and wireless assets, some of which have realized values close to or in excess of the parent company's.

RSL Communications Ltd., of Hamilton, Bermuda, raised $96.25 million from the sale of a 20% stake in IP telephony technology subsidiary Deltathree.com Inc., New York, earlier this month. The newly issued shares in Deltathree.com soared to $29 from $15 on their first day, valuing the company at about $1 billion. RSL's own shares jumped 10% to $22, for a market capitalization of about $1.2 billion, making the parent company worth just marginally more.