BT and mmO2 have both seen their share prices rise after their demerger.
BT’s former wireless arm, mmO2, began its first day of official trading on the London Stock Exchange on Monday. The mobile operator, which has networks in the UK, Germany, the Netherlands and Ireland, saw its shares rise 7% to 85.7p by lunchtime, while BT’s share price rose by 5% to 290p.
The news will be a relief to mmO2, BT and their shareholders. Even though mmO2’s share price is below the levels that many expected when the demerger plans were announced, it is way above the levels it was reaching in the gray market last week. The rise in the core business’ share price is also welcome.
However, analysts at ABN Amro believe these gains are unjustified, and that mmO2’s fair price is currently 70p per share. There are two major factors that will determine whether this gloomy prognosis is right: the management’s ability to make money out of the new structure, and the prospects of a takeover.
Management is the main area that concerns ABN, mostly because of BT’s poor track record. While the new management team under Sir Christopher Bland has made the strategic decisions that the markets wanted, there is no guarantee this will lead to increased profitability. BT and mmO2’s managers still have a lot to prove.
At the same time, BT and mmO2 could both be attractive targets for a bid. BT has a reliable (albeit uninteresting) revenue stream from its UK fixed-line business, which would be a good fit for a financial group going for asset securitization. The company’s services and long-distance businesses could be sold off. MmO2, meanwhile, has the advantage among mobile groups of just $700 million in debt and licenses in two of Europe’s largest markets. It would fit well with Spain’s Telefonica.
Any bids are likely to be some time coming, as potential buyers will want to wait until BT and mmO2’s managements have demonstrably either succeeded or failed in their turnaround task. Either outcome could then encourage bidders.
