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Tuesday, 23 October, 2001, 15:20 GMT 16:20 UK
MMO2: A risky investment?
Graph of BT share price
BT shareholders will have some thinking to do when the mobile-phone company MMO2's shares become part of their portfolio.

Investors in BT have already been on a rollercoaster ride that has taken the value of their investments to a peak of 1,358.5p and a trough of 342p over the last five years.

And the mobile phone business must take a substantial portion of the blame for both the boom and the subsequent collapse of the share price.

Now, the very unit that caused the chaos is being spun off and rebranded as MMO2, leaving shareholders to mull whether they should stick by the new, and potentially risky shares.

Float price nerves

As the countdown to the start of trading in MMO2 has progressed, the float price of the new stock has been steadily revised down by analysts.

Goldman Sachs has recently issued a research note valuing the stock at 70p, almost half the level originally bandied around by analysts.

The strategy of MMO2 is not as clear as that of Vodafone or Orange

Andrew Layton
Telecoms consultant

But while some union members and private shareholders have poured scorn on the spin-off, the majority of analysts and institutional shareholders have given the demerger the thumbs-up.

"We see the demerger of MMO2 from BT as a positive step, despite our reservations about the overall group valuation," said Goldman Sachs in a research note.

Firm financial footing

Among the advantages, MMO2's senior management will be able to focus exclusively on the mobile phone strategy, and the company will have a freer rein to compete in the UK.

MMO2 will also start out on a firm financial footing with just 500m of debt, giving it one of the strongest balance sheets in the wireless industry.

BT paid a total of 9.5bn for licences for the next generation of mobile phones, but only chose to divert a tiny proportion of this onto the new company.

But there is also a great deal of uncertainty over how the new company will fare, and that spells high risk for the investor.

Brand appeal

One of the greatest unknowns is whether the new brand will appeal to customers.

And MMO2 does not only need to create popularity, it must also prove that it can generate an acceptable level of revenue per user.

The market's current preference for defensive investments suggests that MMO2 might have a difficult start to its independence

Goldman Sachs
As the mobile phone market becomes saturated, the amount of money squeezed out of each customer is a crucial factor in the profitability of operators.

And just how MMO2 plans to do this is not as clear as the well-established methods of some of its competitors.

"The strategy of MMO2 is not as clear as that of Orange or Vodafone who are very vocal in outlining global strategy for growth and branding," Andrew Layton, principal consultant at DiamondCluster, told BBC News Online.

Size matters

The relatively small size of MMO2 - and its ability to survive alone - is also a potential worry.

While Vodafone and Orange have aggressively built up pan-European positions, MMO2 can only boast a small market share in both Germany (6%) and the Netherlands (8%) alongside its strong postions in the UK and Ireland.

And the limited European presence will mean that MMO2 will not be able to take advantage of the economies of scale or offer roaming services in the same ways as its bigger competitors.

This has led many analysts to expect the demerged unit to be taken over, as smaller operators try to combine their strengths to wrestle with the big players.

But while the risk of a takeover or merger may create fear of redundancies, it might well add value to the shares.

Risky 3G

And MMO2, along with all its peers, must also face the nerves of telecoms investors who have been hurt before.

While the telecoms sector has already radically re-assessed its evaluation of the future potential of the telecoms market, there could still be more disappointment to come.

The success of third generation mobile phones - which promise users faster internet connections - remains an unknown quantity, even though the operators continue to invest large sums of money to build the networks.

"While mobile stocks have recently returned to favour, the higher-risk telcos continue to experience a lot of volatility, demonstrating the market's unwillingness to pay today for the promise of earnings growth tomorrow," said Goldman Sachs.

And the immediate direction of the MMO2 shares is likely to reflect the strength of BT's existing shareholders' faith in the troublesome sector.

See also:

23 Oct 01 | Business
BT approves mobiles spin-off
24 Sep 01 | Business
BT chiefs mull total split-up
22 Oct 01 | Business
BT eyes Post Office vans
19 Sep 01 | Business
BT loses enquiries monopoly
05 Sep 01 | Business
Mall disputes BT name change
03 Sep 01 | Business
BT unveils new mobile brand
02 Sep 01 | Business
BT heads for November demerger
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