Putting the cat among the telecommunications pigeons has become something of a habit for Craig McCaw. It started when he began selling the family silver at the Kirkland, Washington McCaw Communications Cos – cable television interests, other sundry wire and wireless systems and services – in order to buy into cellular franchises in unlikely markets across the US, assuming what many predicted would prove an innsupportable debt burden in the process. In the early 1980s when the young McCaw first began his campaign, the US cellular scene was extremely fragmented, because the Federal Communications Commission did not realise quite what a valuable property the radio spectrum represented, so that instead of charging people for the privilege of access to designated parts of it, when these were freed up (usually by the military, needless to say), it used an arcane system of offering them by lottery.

Fragmented

The rules for cellular telephony decreed that two carriers would be licensed for each market, one of which would be the resident local phone company. Anyone was free to put in a bid for the other one, which resulted in an extremely fragmented infrastructure in which regional newspaper groups, your wealthy friendly neighbourhood dentist, or a little old lady in Florida who had made a pile playing the market might – and did – end up with what were then regarded as not particularly valuable franchises. Once real cash was required for the systems to be built, these lucky lottery winners would be wooed by one or other of a host of semi-professional telecommunications operators, a consortium would be formed in which the little old lady or the dentist might remain with a small holding, but would more likely take the money and run. It was into this scene that Craig McCaw stepped, and with breathtaking gall, he stomped all over the country making offers many consortia found hard to refuse for an interest or control, until he had an important position in all the major US conurbations, and about half the second-ranking ones, and almost before potential rivals realised what was happening, he had locked up the makings of a US national cellular network. In the process, the Cellular Communications Inc subsidiary of McCaw Communications Cos became the company, and the company, loaded to the gunwales with debt, went public in 1987 at a breathtaking valuation. Not only was it sinking under the weight of debt, it had never made a profit, and no profit was in prospect for many years. Very many years: it was still losing $260m a year last year. We pointed out at the time that McCaw’s valuation meant that Vodafone – already profitable – had to be worth more than value put by the market on the entire Racal Electronics Plc group – and nine months later, Racal announced plans to demerge Vodafone to create the triumphantly successful Vodafone Group Plc. If Craig McCaw – who has effectively agreed to sell his company out now for $18,000m, being the $12,600m price plus the debt that AT&T Co will have to assume – was regarded as a maniac while his was building his still far from complete empire, the epithets cast on Sir Ernie Harrison while he was building up Vodafone were very little kinder, but to each, pursuit of a vision has brought its reward.

Scarcity value

The effect is once again to highlight the scarcity value in untrammelled telecommunications companies of size. The London market, unnerved by prospects of growing competition, is still clearly underestimating Vodafone’s scarcity value, and the number of other companies with comparable scarcity value can be counted on the fingers of one hand. There is Cable & Wireless Plc of course, which not only has Mercury Communications Ltd but also has a big lead over all its rivals in the race for Cathay with its 58% of Hong Kong Telecommunications Ltd. There is Sprint Inc, which is the only long-distance play left in the US now that MCI Communications Corp is locked up by British Telecommunications Plc. To underline the reach of Craig McCaw’s vision, MCI wants to spend large parts of British Telec

om’s cash getting into the cellular business: back in 1985, MCI was one of the companies that sold out all its cellular interests to Craig McCaw (CI No 250). McCaw’s strategy effectively made it impossible for anyone else to aggregate a comparable US-wide cellular network, so MCI has all its hopes pinned on its Personal Communications Network initiative to build a national system from scratch by rallying a vast consortium. And in Germany, there is Mannesmann Mobilfunk GmbH, where Cable & Wireless is among the shareholders, and which might well end up as the digital cellular tail that wags the controlling giant Mannesmann AG steel pipes dog (and what a dog, to quote the Everly Brothers). After the four mentioned, for companies with scarcity value, one has to start looking deep into the future, with Energis Ltd currently looking the most promising. Energis is owned by the UK National Grid Company, which is in turn owned by the 12 regional electricity distribution companies. It has the supreme advantage one having the infrastructure in place to build a UK-wide trunk network at relatively minimal marginal cost because it is stringing its optical cables between its electricity pylons. In the future, one can see the valuation of the distribution companies being enhanced by their stakes in Energis: it seems highly likely that if they don’t seek to cash in too soon, like the newspaper groups that financed their printing press modernisations by selling tranches of their shares in Reuters Holdings Plc, the electricity distributors will in the medium term be able to do something similar with their Energis shares. Hutchison Telecommunications (UK) Ltd could acquire a sheen now its cash is invested.

Fight the merger

Meantime, back at the McCaw camp, there is needless to say a frantic fluttering around the dovecote as the Baby Bells point out that McCaw gives AT&T the ability to bypass the local loop and feed customers via cellular direct into its long distance and international service, and Pacific Telesis Group Inc, Southwestern Bell Corp and Bell Atlantic Corp are three that have leaped in to howl that they by contrast are forbidden to enter the long-distance or international markets (they can invest abroad, but can’t link international calls that they carry to users on their local networks). Pacific Telesis points out that the AT&T development demonstrates how essential it is that it should pursue its plan to float off its own cellular interests. From the customer’s point of view, the deal is seen bringing much cheaper long-distance cellular calls. AT&T is thought likely to offer substantial discounts on its new cellular phone services to encourage its customers to enter the still fast-growing market, which has ridden the prolonged recession better than most and is poised for a new break-out. There is of course a deal of regulatory wrangling to be got through before the McCaw deal can be completed, and the acting head of the US Federal Communications Commission says that the agency must keep an open mind to any valid opposition when it reviews the proposed deal. The Baby Bells are promising they will fight the merger all the way.