Forum Archive Index - January 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

Hugh - the answer as to why the  'TEL share price hasn't collapsed in a heap' as per your post the other day is likely embedded in this from ABN Amro's Cameron Stewart (from stuff.co.nz)

Mr Stewart said Telecom rose 21c to 508 as people in the market talked of it dropping its attempt to buy Australia's third ranked telco, Cable and Wireless Optus, in favour of pursuing other telcos in that country."It looks like they're not going to go for Optus - it looks like they're going to look for something else in Australia."

On the other hand Reuters report JB Were as saying there 'is a strong probability of Telecom securing C&W Optus assets'

Take your pick but the report that TEL have dropped their attempts to get some of Optus with the subsequent increase in the TEL share price does make some sense.

Contrary to gut feeling (and not having had a close look at the TEL finances etc) I too thought that at 500 it was overvalued, when you considered the risks involved in buying CWO assets.

However on closer examination it seems that the market had already included a huge risk factor in it's pricing of TEL - this resulting in the current TEL price. It makes sense then that if this 'risk factor' is no longer present the market will self correct and the TEL price will go up.

At 500 for TEL the implied NPV of future returns (market to book value comparisons) was about $2.2B. Considering this years profit is forecast at $0.7B that NPV has to be on the low side. If we took TEL at 750 (JB Were's fair estimate) the implied NPV is about $6.6B. In view of potential profit streams etc a more realistic figure. My view is that the market has already built in a  'risk' factor of up to $2B to cover the premium that TEL would likely be paying for any CWO assets.

Interestingly approx $2B would be TEL share of the 'premium' that CWO is trying to extract for its shareholders.  From a JB Were report out of Australia (in the SMH)  -  "Our sum-of-the-parts or break-up valuation is $4.55.  Following our adjustments for capital gains tax implications, our break-up valuation falls to $3.71. Our discounted cashflow valuation remains $1.95."  Hence the high PE and other ratios on CWO.

The 'premium' that CWO are obviously trying to extract is therefore about A$8B. TEL share of this (on the publicised partnerships with Dot Mo Co) about $2B. Is this factored into the current TEL price?

The CWO sale is being driven from the UK. What C&W want for their 52% share is anybodys guess but the Australian shareholders will want at least the A$3.70 the current price is. Therefore contrary to all acquirors good intentions there has to be a substantail premium paid somewhere along the line.

Maybe the market does reflect long term prospects as well as future risk much better than we give it credit for. In TEL case the ABN Amro report does make a lot of sense and was the motivation for me to do a bit of closer investigation.

If corrrect and TEL has given up on CWO assets then the TEL price will head back to 600 plus.

However if JB Were is correct (and that seems the more popular case) I feel that the current price is about the right level. However the market usually gets excited about acquisitions and it will still most likely head towards 600.

Only time will tell but an interesting story is developing.

Hugh - from your posts over time I'm sure you would enjoy reading "The Synergy Trap, How companies lose the acquisition game" by Mark Sirower. Has some pretty heavy technical parts included but the narrative makes interesting reading. Maybe some extracts on amazon.com or bn.com but some insight if you search yahoo for "synergy trap". The conclusion Mark comes to is that most acquisitions are DOA (dead on arrival) and have destroyed billions of shareholder wealth (for the acquirors that is).

Regards

Peter