Great Titchfield Street, London – If you decide to buy shares in Orange they will certainly go up, at least in the short term. As many commentators have said, "they are priced to go". Individual investors have a 4% discount on the offer price. As in any IPO you won't have to pay dealing charges nor stamp duty to participate. The company is valued at just a third of what France Telecom originally hoped it might be.
In theory then, this is a one-way bet. The advantages look obvious and any fool should be able to turn a quick profit on Orange's flotation. Fair enough, that's one incredibly short-term way of looking at the flotation. But don't let this risky trading strategy distract you from the real matter in hand. Remember the majority of shares issued in IPOs end up below their original price.
The only way is up?
If you want more than a cheap thrill and are thinking of holding the shares for longer than a speculative few days, you'll have to look at the business behind the persuasive marketing hype and decide what the prospects are for such an investment. This is where the holes start to appear in Orange's slick presentation and many questions about the group's future strategy need answers.
First of all, the group's influential chief executive Hans Snook, who has guided the group to its present position, plans to step down from running day-to-day operations. Despite floating off 15% of its stake, France Telecom will retain the remaining 85% of the company. A former France Telecom executive has been put in charge.
So "New Orange" as it has been dubbed is significantly different from the UK operation that mobile telecom executives played pass the parcel with last year. The majority of the reincarnated Orange's customers and revenue comes from Iteneris, France Telecom's mobile arm. So essentially Orange is just the wireless offshoot of the French state-run former telecom monopoly.
It's as if investors are asked to get excited by BT (LSE: BT.A) flogging a little bit of BT Cellnet! Whereas UK Orange doubled the number of customers it had last year (I was one), allowing revenue to rise 76%, over in France Iteneris only saw a 64% hike in subscribers, meaning turnover went up 40%. The French arm is larger and growing at a slower rate.
Expansion or saturation?
The Orange branding miracle will have to find fresh markets to conquer. This is where it hopes to expand, leading to all this talk of being "in 50 countries within 10 years". At the moment, this looks like an ambitious programme. Throughout Europe most people now have mobiles. The market looks increasingly saturated. Orange will not find things as easy as in the fledgling UK market of 1996.
The company will sorely miss Hans Snook in this battle as well. Another problem is that France Telecom has built up many minority stakes in mobile operators in other countries. In order to work the Orange marketing magic and re-brand these companies, the company will have to spend money to acquire a controlling stake. Mobilcom in Germany is a particular concern. So life is not going to be easy for new Orange.
The company may only have €5 billion of debt at present. However, this is likely to jump. The main cost will be the much-vaunted roll out of 3G services, not to mention the cost of acquiring further licences. This will cost at least 10 billion Euros per year. However, there are increasing doubts about the take-up of this grandiose project. Are mobile Internet services going to be all they're currently cracked up to be?
After all, WAP is crap and 3G may not be any better. There have already been delays in rolling out 2G. The next generation services will have to be priced expensively to recoup the cost of setting them up. But this high price may in turn put off people, meaning the mobile phone companies will have huge liabilities. Undoubtedly all the mobile companies will have to trim their optimistic 3G forecasts.
So what about profits? Orange has never made one. It will not make one for at least five years, despite what optimistic house brokers would have us believe. Steer clear of Orange for now. You'll be able to pick it up cheaper in the future. Don't stag this IPO. You may be left in a tight speculative squeeze.
Vote Bear!
PS What's more, have you heard what mobile phones can do to your brain? They're a potential health hazard, I hear!
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