Analysts favour Vodafone Airtouch combo

The pending Vodafone Group and AirTouch Communications merger is being viewed by analysts and investors as excellent news for consumers, the two carriers and the companies' shareholders.

The merger, which was announced late Friday, will form the world's largest wireless telecommunications company, with a market valuation of about $110 billion. The new company, to be called Vodafone AirTouch PLC, will serve more than 23 million cellular and PCS customers in 23 countries, the company said in a statement.

The new company will have a strong presence in almost every European country. "They have very complementary footprints in each country in Europe," said Patrick Donegan, senior analyst with the Yankee Group in London.

Vodafone is already the largest provider in the UK. In addition, it is strong in France, Greece and the Netherlands through partnerships in those countries. AirTouch, on the other hand, is successful in Portugal, Spain and Italy. "When you put down the respective coverage maps, you have a complete coverage of the European market," said Donegan.

"For Vodafone, it fills in all the gaps in its networks: Italy, Spain and Portugal," agreed Paul Sharma, a financial analyst with Henderson Crosthwaite Institutional Brokers in London. The two companies have mostly complementary networks because they were often competing for licenses in Europe, explained Sharma.

The one country where both companies are strong is Germany, where Airtouch and Mannesmann together own Mannesmann Mobilfunk, which has some 5.2 million customers for its D2 mobile phone network. Vodafone owns 17.25 percent of D2 rival E-Plus, but according to the German daily Handelsblatt, Vodafone plans to sell its share. If the new company wants to avoid competing against itself, it will have little choice, agreed analysts. "AirTouch's share in D2 is an obvious jewel in its crown. I can't see them getting rid of that," said Rob Ollerenshaw, Director of Market Analysis at CiT Research in London.

"This is a good deal for consumers, for the shareholders of both companies and for the companies themselves," said Donegan.

Users will benefit from cheaper long distance calls due to economies of scale, and more harmonised features across borders, something corporate customers will especially appreciate, said Donegan.

The merger spells trouble for the pairs' competitors -- the mostly former national monopoly carriers -- agreed analysts. "In most European markets, where Vodafone has a shareholding, then the other competitors are going to face a more powerful competitor in terms of pricing, purchasing and in terms of services. (The merger) will definitely give all the family of operators a lift," said Donegan.

In the UK, British Telecommunications' Cellnet is particularly vulnerable, said Guilia Rancati, wireless analyst with International Data Corp. "Even though Vodafone has an equal number of customers to BT's Cellnet, it (Vodafone) has double the revenues because it focuses mainly on the more profitable business customers," said Rancati. A spokesman from Cellnet was unable to confirm those figures, but did argue that Cellnet's revenue per customer, and minutes (of use) per customer have both increased over the past six months.

On the surface, analysts were loathe to come up with any negatives. Even the idea that merging the two corporate cultures could present challenges was all but dismissed.

When one looks at most telecom mergers, one can see all sorts of obvious problems, said Donegan, but on paper, these two seem extremely well matched. "They have a good chance, because they have been working closely together. They have been flirting with each other for the best part of three years," he said.

For Vodafone, which has been working to expand its international presence, the deal is good news, said Nicky Scott, a consultant with Ovum in London. A large, internationally recognised operator also has a better chance when bidding for new mobile licenses. "And of course, its creates an automatic global roaming agreement between Vodafone and AirTouch," said Scott.

Vodafone's rapid international growth gives it the means to counter an anticipated flattening of domestic revenues, said Rancati. "By 2000, we anticipate that more than half of the company's revenues will come from outside the UK," said Rancati.

The merger is generally regarded as being very positive in London's financial district, said Sharma, who said Vodafone's share price was up 15 percent by mid-afternoon.

In Japan, the merger could gradually turn up the heat on a market already in turmoil.

AirTouch has been quietly pushing into Japan through equity participation in a provider that goes by the name J-Phone. The provider is one of several trying to compete with local powerhouse, NTT Mobile Communications Network, known as NTT DoCoMo. The NTT subsidiary has brushed competitors off handily - for instance two Japanese cellular providers are expected to merge in order to boost their competitiveness, according to a press report today -- but the Vodafone/AirTouch merger could add a strong new player to the market, according to Toshiaki Iba, a senior analyst at Tokyo-Mitsubishi Securities.

"DoCoMo has been king but now an operator bigger than DoCoMo is coming to Japan," Iba said. Though Iba said it is unclear how the Vodafone/Airtouch merger will affect competition, the partnership is a plus for a next generation cell phone technology called W-CDMA, and pioneered, ironically, by DoCoMo.

Airtouch has been a backer of the technology and in December of last year joined Japan Telecom and Nissan Motor in a Japanese joint venture that will offer W-CDMA service sometime after 2001. That Vodafone is buying a supporter of the technology, is "positive for the W-CDMA camp," Iba said.

(Mary Lisbeth D'Amico in Munich and Rob Guth in Japan contributed to this story.)

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