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MARKET COMMENT
By
Carburton Street, London -- There are two parts of the global equity market where investors have been prepared to pay high valuations. One is geographic: Japan. The other is the mobile phone sector. So it is perhaps little surprise to learn that Vodafone (LSE: VOD) has bought shares in Japan Telecom on a price to earnings ratio of 291. In fact it has actually paid more than that because that ratio is based on yesterday's market price, which valued 15% of the company at £1,324m. As a result Vodafone paid £1,500m for the 15% stake it acquired from two Japanese railway companies. The logic of the deal is to get access to the Japanese mobile phone market, the third biggest in the world. However, doing that by buying a stake in Japan Telecom, which in turn owns 54% of J-Phone, the mobile phone company, seems an expensive way of going about it. Look at the anaemic annual sales growth for Japan Telecom for the last three years.1999 7.1%
1998 -1.7%
1997 4.3%
Vodafone owned a 26% stake in J-Phone before this deal, but that just means it provides capital and some expertise without having any real control over the business. And the same applies to its stake in the parent. British Telecom (LSE: BT.A) and AT&T (NYSE: T) have each supplied 20% of the capital but only got 15% of the votes in Japan Telecom in return. Real power still lies with the railway companies that together control the largest block of shares.
J-Phone itself is the majority owner of three regional mobile phone operators in which Vodafone also has stakes of 10 to 15%. However, J-Phone is only the third largest mobile network in the country. So, is it worth paying nearly half a year's operating cash flow to get a small stake with a complicated structure in a third-rate operator? Sure, the deal allows Vodafone to boast of yet more proportional and venture customers. But when will it get any cash out? The 4.5p fall in the share price to 249p shows what the market thinks. Who knows, it may even be right.
Where Next?
Vodafone discussion board
Telecoms sector discussion board
Japan Telecom website
