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January 19, 1989

BRITISH TELECOM PAYS BIG PREMIUM FOR 22% OF McCAW CELLULAR

By CBR Staff Writer

British Telecommunications Plc stunned the City yesterday by announcing that it would pay a whopping $1,500m for its 22% stake in the number one US cellular phone operator McCaw Cellular Communications Inc. The purchase, flagged here last week (CI No 1,093) was not a surprise, but the price very definitely is: the payment represents a price of $138 per pop – per head of the population covered by company, higher than McCaw Cellular itself has ever paid to acquire a local US company and well above the usual rates: when 10% of the shares were sold in August 1987, at the peak of the market, the entire firm was valued at $2,200m (CI No 737), and by comparison, Racal Telecommunications Group Plc in the UK was valued at under $80 per pop before the news. Telecom concedes that it has paid a 40% premium on a share price many analysts claim is already inflated – Racal Telecom, whose shares leaped 27 pence to 235p yesterday, is profitable, McCaw is not. Nevertheless, British Telecom USA Holdings Inc will buy about 37m newly issued shares of McCaw’s Class A and Class B common stock for $41.50 per share. Under US law foreign ownership of cellular companies is limited to 25%. As well as 22% of the enlarged equity, the company will appoint four directors for the board of 19; the deal is subject to review from US regulatory bodies. For its part, Telecom maintains that cellular companies have been undervalued in the past as growth in the sector has been underestimated. McCaw will look to buy further licences, although whether British Telecom will have a veto on any such purchases will not be known till next week. The deal does, however bar the British phone company investing in rival US cellular operators.

British Telecom has also done an interesting little deal with AT&T Co, agreeing to make it possible for the 140,000 users of its worldwide Dialcom system to exchange messages with the 40,000 users of AT&T’s AT&T Mail electronic mail system – which will be used within the FTS2000 telecommunications syst-em for the US government: exchange will be via the X400 message handling proticol, and the two will also work together on devising an international standard to enable electronic mail operators to work out how to pay each other for their customers’ usage of other systems.

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