Telenor fight for Esat has life in it yet

The mini 2.68 per cent spurt in Esat's share price to $91 1/8 on Nasdaq on Friday indicates that the sole bid from Norwegian state telecoms company Telenor is far from over. Speculation that a white knight might emerge has kept the share price well above Telenor's second hostile bid of $85 per American depository share (ADS). And further speculation that Britain's cash-rich BT may be about to offer $95 per ADS - Esat has refused to comment - will give speculators further ammunition this week.

While Esat is talking to possible suitors, so far there is one offer only on the table. So how does that stack up? Telenor has based its bid price on calculations used in previous deals. But Esat has questioned Telenor's figures and says its analysis is "selective, flawed and misleading". Which group is correct?

Traditional valuation methods are inappropriate because there are no profits yet. Instead the herd instinct has come into play, with mobile phone companies being valued on the basis of a multiple per subscriber and fixed-line operators on a multiple of revenue. Esat stands on these two legs.

Telenor's second bid of $1.9 billion (€1.88 billion), up from $1.6 billion, rejected by Esat, is precisely broken down: Digifone interest $1,079 million, Esat's fixed-line operations $656 million, PostGem/Ireland-on-Line $147 million, minus $363 million for debt and minus 20 per cent to reflect lack of control of Digifone. It then adds a premium of 46 per cent.

Esat's main assets are its 49.5 per cent stake in mobile phone company Digifone (Telenor owns the other 49.5 per cent and financier Mr Dermot Desmond owns the remaining strategic 1 per cent), and the fixed-line operations. Esat's chairman, Mr Denis O'Brien, has already weakened his negotiating position by putting a price on that stake with an offer to buy Telecom's stake on November 21st, 1999 for $700-$800 million. But he could argue that this was an opening shot. Also, with mobile phones having a penetration of only 30 per cent here, there is scope to increase this up to close to 50 per cent, indicating a strong future for Digifone.

Telenor has based its $863 million valuation of Digifone on the acquisitions of E-Plus and One2One. This has been arrived at by taking 20 per cent off to reflect the minority stake. That is a distinctly odd approach, as Telenor would end up with a controlling stake in Digifone. And that should command a premium, not a discount. Excluding this discount, Telenor's figures indicate the offer is on a 25 per cent premium to Telenor's valuations, and not 46 per cent.

If there is to be a battle ground over the valuation of Esat, it is likely to centre on the valuation of its fixed-line operations. Telenor used an average of what was paid for Racal Telecom and Enertel as the basis for its calculations. This gave the enterprise value of $656 million based on a 7.2 multiple of the revenue.

Telenor insists Racal and Enertel are comparable and, unlike Esat's fixed-line operations, are profitable at the operating profit level. Esat disagrees, pointing to Racal's revenue growth of 12.1 per cent compared to Esat Telecom's 197.3 per cent. Indeed, Esat has a point and promises to communicate recent information to shareholders, which is likely to include details on the contribution from Kedington and other acquisitions. Telenor has given precise information on why shareholders should accept its offer. Esat should respond and give precise information on why the offer should be rejected.

Revenue from the fixed-line operations has been expanding rapidly. It grew by 113.1 per cent in the six months to September 30th, 1999 and is estimated to reach around $100 million in 1999. Analysts have already forecast to $160 million this year but this does not take recent acquisitions into account. Esat has signed up around 9,000 corporate customers and with the expansion of fibre-optic cable, this should be a strong growth area. Revenue of $180 million this year would imply a prospective revenue multiple of around six, which puts the consideration on the low side even though the fixed-line operations are not expected to go into profits for some years.

The main barrier to a white knight is, of course, the 49.5 per cent holding Telenor has in the mobile phone business. This could be made easier with the purchase of Mr Desmond's pivotal 1 per cent, but that could still leave a disgruntled Telenor. That could be a major issue now that some strategic partners question the wisdom of this path.

Already Telenor has been embroiled with its Swedish neighbour, Telia, resulting in the collapse of their merger. While Telenor can brush this off with nationalistic fervour when it goes public in an IPO this year, it would be more difficult to brush off a failure to acquire Esat, particularly as it has a significant stake in its mobile phone subsidiary. That would not look good in an offer document.

Telenor has not ruled out a third, higher, offer to secure Esat. This is an important week for the Norwegian company. The first closing date is Friday and it has only four days after that time to increase its bid, unless there is a counter-bid.

Bill Murdoch can be contacted at bmurdoch@irish-times.ie