MARKET COMMENT
Orange outlines flotation plans

By Christopher Spink
January 22, 2001

Carburton Street, London -- 600,000 people have registered an interest in France Telecom's forthcoming flotation of a 15% stake in its Orange mobile phone offshoot. Today, the dominant French fixed line telecom company, equivalent to BT (LSE: BT.A), has set out the price it hopes to get for these shares. A prospectus will be available on their site later today. Should investors buy Orange shares then?

Until the prospectus has been thoroughly digested, this is hard to ascertain. All investors should realise that the majority of shares sold at initial public offerings (IPOs) flop and fail to recover the price that they were sold at. Remember, the existing owners of such businesses are selling shares for a reason.

In this instance Hans Snook, Orange's influential and visionary founder, has stepped down from a full time role and will stay on Orange's board only as a part time special adviser on strategy. France Telecom, like BT, has heavy debts. Banks have forced the company to sell an interest in Orange, the UK arm of whch was acquired from Vodafone (LSE: VOD) last summer for 38b euros.

With the possible proceeds of 9.75b Euros the group has to buy Vodafone's remaining 10% stake in Orange, clear some of its hefty debts and also pay for the forthcoming French 3G mobile telecom licences, which will cost about 5b Euros.

Around 243m Orange shares will be priced at between 11.5 and 13.5 euros. This values the company at between 55.2b and 64.8b euros. In addition the group has net debt of 5b euros. With the interest already shown, the shares could initially soar, particularly as the issue is being organised like a 1980s privatisation. Individual investors will receive a 0.5 euro discount on each allocated share.

However, is Orange's business (now combined with France Telecom's previous mobile interests) worth buying into at this level? Headlines over the next few days will concentrate on how France Telecom has only managed to get less than half the price it originally planned. Ignore this. All mobile phone companies are worth far less than they were last summer. Orange's main rival Vodafone has lost a third of its value.

Nevertheless, there is reason to believe that demand is still strong for mobile services and will remain so for several years. At the moment Orange is not profitable. To compare it with other mobile phone providers, such as BT and Vodafone, we need to work out how much each subscriber is worth, using top of the range valuations.

               
            Value   Users  Price per
                            user (e)
BT Wireless   58b   20.7m     2800
Vodafone     232b   78.7m     2950
Orange        65b   26.0m     2500

In theory then Orange seems the 'cheapest' mobile company UK investors can get exposure to. This discount does look attractive. However, be aware that Orange does not plan to break even for at least four years. There is no need to rush out and buy Orange shares now. There will be plenty of opportunities in the future after reading the prospectus carefully and other opinions on the Orange discussion board. The offer closes on February 8th.

Where Next?
More comment: Orange is back
Visit the Orange discussion board | share offer website