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August 2, 1987


By CBR Staff Writer

If one chooses to regard UK cellular communications market as directly comparable with the US cellular market, Racal Vodafone Ltd on its own should be valued at as much as UKP2,400m, whereas the the entire Racal Electronics Plc group is valued at only about UKP1,400m on the London Stock Exchange.McCaw Communications Cos, headquartered in Kirkland, Washington state, is selling 10% of its McCaw Cellular Communications Inc unit, 10.5m shares, to the public in a week or so, and has set a price of $20 a share, valuing the company at an astronomical $2,200m, 120 times the value of its 1986 sales. And this for a company whose losses were double its sales figure last year. McCaw Cellular Communications has licences in 94 markets including San Francisco, Pittsburgh, Denver and Kansas City, Missouri, covering a population base of 37m people, no more than 1.5% of which are likely to buy cellular phones. But that $20 a share values its licences at $70 per head of population in the markets it covers. And applying that figure to Vodafone, with coverage of about 53m of the UK population, generates the UKP2,400m figure. Moreover McCaw Cellular recently agreed to pay about $70 a head for a Miami licence, but that is at the high end of such transactions – licences more usually change hands at $40 to $50 a head, but that still values Vodafone on its own at around Racal’s entire market cap, throwing in the rest of the business in for nothing.

Vodafone close to profit

The comparison between each side of the Atlantic may not be strictly accurate, because the degree of competition in cellular operations in the US is questionable, and a single company often has an effective monopoly over a given area, whereas in the UK, fierce competition is the name of the game between the two operators, Racal Vodafone and British Telecom-Securicor’s Cellnet, which both claim now to cover around 90% of the UK. The US scene is very different from the European cellular market, says Nomura Research analyst Ian Cole, and the US has a tendency to hype the ratios. In addition, Europe will have a pan-European standard service in five years time and this will mean that margins are unlikely to be as high as they may be in the US. On the other hand, Vodafone is close to profitability already where McCaw is a chronic loss-maker, all of which suggests that American investors bitten by the cellular bug should forsake the ramp in McCaw and look to the incomparably better value represented by Racal – 276 pence at close of play on Friday, and if they get trampled in the rush, they could always do a few sums on Securicor Group Plc in light of its 40% of Cellnet.

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