Vodafone Bites Back At NTT DoCoMo, British Telecom - increase stake in Japan Telecom - Company Business and Marketing

By Mark Holmes, mholmes@the-phillips-group.com

LONDON - Lest anyone think NTT DoCoMo [NTT] has been allowed to run amok in Vodafone's [VOD] stomping grounds, the operator has retaliated by invading the purveyor of the wildly successful i-mode service's own backyard. Vodafone has agreed to pay AT&T [T] $1.35 billion for its 10 percent stake in Japan Telecom, raising Vodafone's share to 25 percent.

NTT DoCoMo, whose i-mode mobile Web service has attracted more than 17 million customers in Japan since its 1999 launch, entered the European market in January as part of deal with KPN [KPN] and Telecom Italia Mobile [TI].

Vodafone's investment gives it an enviable position in the Japanese cellular market (long dominated by NTT DoCoMo) through Japan Telecom's wireless subsidiary J-Phone. Vodafone already holds a 26 percent stake in J-Phone; Japan Telecom controls a 54 percent stake; and British Telecom [BTY] has a 20 percent stake in both Japan Telecom and J-Phone.

But BT may be the worse for wear as the dust of Vodafone's latest move settles. It seems Vodafone may now have the upper hand on BT in an ownership battle - and Vodafone's success ultimately could hasten BT's exit from the Japanese telecom market.

"It is both good and bad news for BT," said John Tysoe, a telecom equity analyst at WestLB Panmure. "It is bad news in the sense that BT has said its strategy was Europe and Japan and, therefore, Japan Telecom and J-Phone were seen to be part of the core business of BT Wireless. Therefore, the fact that they are in danger of being marginalized again by Vodafone is not good. Against that, this suggests that there is a ready buyer for the BT interest in J-Phone, which is more than we can say for many of the other assets [BT is] looking to sell. Secondly, the kind of valuation being placed upon it must be encouraging, because if you draw a line through the price that Vodafone paid for the AT&T stake, for BT's 20 percent plus interest in J-Phone, implies to us a valuation of around $5.5 billion. This is about a third of the amount of money that BT is looking to raise in total."

A BT spokesman denied the deal was a major blow to BT.

"We are not in a weak position at all. We will still have extensive voting rights and still see Japan as a key market for us," he said.

BT may not be grateful for the one-upmanship, but it also might not sneeze at several billion dollars that could go toward reducing its mountainous debt.

"The increase in the stake in Japan Telecom...illustrates the advantage that Vodafone has in terms of the strength of its balance sheet, relative to its competitors. British Telecom is obviously the party here that would be outmaneuvered, if it ever came to a battle for funding," Fanos Hira, a telecom equity analyst at Bear Stearns told Wireless Today, a sister publication to Communications Today.

"I think what was very significant from this deal was that, if you go back to December, Vodafone chose to acquire the original increased stake from the railway companies rather than the obvious seller in AT&T. It effectively outflanked BT," Hira added. "Frankly, it is a one horse race to gain control of that asset as far as I am concerned. It was very similar to what we saw with Airtel in Spain."

The Bottom Line

Whether a good or rotten deal for BT, the Vodafone acquisition certainly is a welcome development for Japan Telecom. NTT DoCoMo has dominated the Japanese cellular market in recent times, and having Vodafone as its main backer gives the operator a boost.

"We see mobile competition in Japan becoming more intense," Mitsuhiro Kurano, a spokesman for Japan Telecom told Wireless Today. "Vodafone is committed to increasing its share in J-Phone, but this is the second time they have increased their stake in Japan Telecom itself. We are not worried about a future takeover. What we actually need is greater financial support from other operators, especially overseas players, as we make large 3G investments in the future."

Goldman Sachs [GS] and UBS Warburg [UBS] advised Vodafone on the transaction, and the deal is expected to close at the end of April.

Vodafone has further advanced its competitive position in the Asia Pacific through a strategic alliance with China Mobile (Hong Kong). The agreement sees the two operators working together to create a global mobile platform, and Vodafone has made China Mobile its sole strategic partner in China in terms of future cooperation within the framework of the strategic alliance.

COPYRIGHT 2001 Phillips Publishing International, Inc.
COPYRIGHT 2001 Gale Group