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Vodafone buys BT assets

May 2, 2001
Web posted at: 0930 GMT

LONDON (CNN) -- Vodafone Group agreed on Wednesday to buy British Telecom's Spanish and Japanese assets for £4.8 billion ($6.9 billion).

At the same time, Vodafone said it will sell new shares to raise about £3 billion to help pay for its acquisitions in Japan and Spain.

The world's biggest mobile phone operator plans to pay £3.7 billion for BT's 20 percent stake in Japan Telecom, Japan's third-biggest phone company, cellular unit J-Phone and 4.9 percent in J-Phone's regional units.

This is Vodafone's third acquisition of stakes in Japan Telecom since last December as it moves to take majority control of the company's prized mobile phone unit J-Phone in the world's second-largest telecoms market.

For Vodafone, the Japanese market represents an important test bed for new high-speed mobile phones, which would offer video and Internet access.

Japan will become the first country this year to introduce the technology and Vodafone will go head-to-head with NTT DoCoMo, the country's dominant mobile phone operator.

The deal would leave Vodafone with an effective stake of about 55 percent in the J-Phone operating companies, but it will not have control of J-Phone due to the ownership structure of the Japanese operator, Mark James, analyst at Nomura, wrote in a research note to investors on Tuesday.

"We are supportive of the transaction because it moves Vodafone closer to taking control of what we believe to be an undervalued operator in a key market," James wrote.

"The final deal to seize control of J-Phone still needs to be done... presumably Vodafone would seek to dispose of the non-mobile assets of Japan Telecom," the analyst said

Debt-laden British Telecom is also handing over its stake in Spain's second-biggest wireless operator Airtel Moviles, as it struggles to control its debt mountain of £30 billion. Vodafone now controls 91.6 percent of Airtel.

BT, which plans to cut its debt by £10 billion this year, said the deal will help to reduce debts by $4.4 billion. The company is expected to outline plans to offload business directories unit Yell and its property portfolio. Further details are expected on May 17 when the company issues its earnings.

The sale comes less than a week after Iain Vallance resigned as BT chairman. He and his chief executive Peter Bonfield had faced calls to step down after the company spent billions on attempting to build a foothold in the cellular market.

BT only last week agreed an option with Japan Telecom allowing it to increase its stake in Japan Telecom's three regional mobile phone companies for ¥68 billion ($555 million). BT invested £1.2 billion in Japan Telecom, together with AT&T (T: Research, Estimates) of the U.S.

The about-turn comes a day after BT's new chairman Christopher Bland started his new job and is a blow to Bonfield, who has staked his reputation on the Japanese investment, analysts said.

Bonfield said: "Our business activities in Japan have developed strongly... when Vodafone approached us with this offer we felt it represented such good value for our shareholders that it was right for us to accept it."

Vodafone, meantime, expects the Japanese and Spanish deals to be marginally accretive on an enterprise value/earnings before interest, tax, depreciation and amortisation (EBITDA) basis this financial year.

Shares in Vodafone (VOD) fell 3.3 percent to 199.75 pence, while British Telecom (VOD) rose 1.7 percent to 609 pence in London trade. Japan Telecom surged 17.9 percent to close at ¥2.64 million in Tokyo.

"Curiously, Vodafone has chosen to issue £3 billion of shares, or 1.45 billion shares or 2.2 percent of total equity, which approximates to a week's trading," Fanos Hira, senior managing director at investment bank Bear Stearns, wrote in a note to investors.

"This in addition to the 8.7 percent stock overhang will undoubtedly suppress share performance in the near term," Hira added, maintaining the banks "buy" rating on the stock with a price target of 275 pence.

"We accept share price performance over the next quarter is likely to be far from spectacular."

Bear Stearns expects Vodafone to have a net debt of £11.1 billion, or current debt to market capitalization of 8.3 percent, at the end of March 2002.

The bank believes the company's debt rating could fall to a single A grade if the sale of Infostrada, the Italian fixed-line business worth about £7.8 billion, is not completed.