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New Media Investor's James Weir analyses what the Orange signals for the telcos
The Orange float was finally priced at €10, following last week's 18% cut in the book-building range. At the time, sources close to the lead managers said that decision was a result of concerns relating to the relative pricing with Vodafone, and to ensure a good after-market performance.
However, the cut sent a clear signal to the market that France Telecom was a forced seller of these assets, squeezed between the high potential cost of 3G network roll-out and the desire to get back the 10% of its stock mortgaged with Vodafone.
There's little doubt this float will set the tone for the first quarter, and the signs so far are not good. Clearly, there are a string of other telcos such as BT, Deutsche Telekom and KPN planning sell-offs of their own to pay for the new infrastructure. Many will now consider alternative methods of capital raising, or putting back the listings to obtain a better valuation.
The truth of the matter is that this listing was a bellweather for investor views on 3G. The valuations were principally based on EBITDA projections for 2002/2003, the first full year of UMTS operations in the UK. The high cost of the network roll-out has been discussed and is reckoned to be €8bn for Orange.
The problem is that completion is so far away and there are so many technical problems possible, that even this large figure is little more than a guess. From being blue-chip stocks with impeccable credit ratings, the former national telcos are struggling to hold on to their shirts.
With hindsight, France Telecom may feel foolish in bringing forward the timing of the convertible bond issue to the same week as the float, as it gives the opportunity for a certain amount of arbitrage between the pricings.
It was certainly a bold move, particularly given the delicate appetite for technology at the moment. Indeed, it shows how strapped it is - the French telco has a €7bn payment to Vodafone to meet by 31 March. This is only half of a total payment of €14bn, the rest of which is due next year. It seems that France Telecom was lucky as the final amount raised was only €9bn - €6.3bn for the IPO and €2.7bn for the bond.
In the event, the first day of trading was disappointing as the stock fell slightly to E9.5, despite the best efforts for a positive performance. The valuation of €48.7bn is well below the €150bn that was predicted last May.
The great unknown of all this, and the element which has not really been considered, is whether consumers actually want 3G services at all. Clearly, for a telco that has just sold the family jewels to pay off the licence mortgage, any lack of appetite is horrendous to contemplate.
But it's a real possibility. The telcos themselves must be aware that the most successful interactive service by volume of usage is SMS, not WAP. And despite the hype about i-mode, it still has very low penetration outside Japan. This is a large gamble on one of the most common technologies of all: vapourware.