GSM shareholders consider cashing out while valuations soar
Insurance firm Warta and steel producer Stalexport are considering whether to sell their respective stakes in Polkomtel (Plus GSM) and Polska Telefonia Cyfrowa (Era GSM), the Business Journal has learned.
"We are under tremendous pressure to sell our shares," said Tomasz Koziel, analyst and adviser in the capital investment department at Warta, which owns a 4.1% stake in Plus GSM.
"Valuations have gotten so high that even a small piece of this cake has become very, very valuable," added a source working close to the management board of Stalexport, a steel producer that owns 5.5% of Plus GSM. "The option (of selling Plus shares) is now under discussion by management."
Brokerage houses estimate that Stalexport's stake in Plus GSM could be worth $100 million to $180 million, while Warta's stake in Era GSM is potentially worth between $70 million and $135 million. But analysts said those are only rough valuations based on the performances of Western European cellular operators; the true value of these shares won't be known until a sale is complete.
"A (share) sale would finally enable us to make a better estimate of what these GSM (operators) are worth," said Zbigniew lapinski, an analyst with Deutsche Morgan Grenfell, which is monitoring Elektrim, an industrial conglomerate that owns 32.5% of Era GSM.
Era GSM and Plus GSM have 820,000 subscribers combined, about 35% more than at the end of 1997. The soaring subscriber figures have prompted major brokerage houses to dramatically increase their estimates of the equity value of these two operators and the stakes owned by their shareholders. "With the valuations going up like this, now might be an excellent time to sell," Koziel said.
"We never saw GSM as a long-term investment. We knew we would sell our shares when we felt the time was right," said the source close to Stalexport, who did not want to be named.
Selling out "makes sense" for Stalexport, which could use the proceeds to upgrade some of its steel mills, said Michal Dobak, vice president and member of the management board of CS First Boston in Poland. "Generally a company should focus on what it does best. Stalexport is in the steel business, not the telecom business," he added.
Analysts said such a share sale, from either Stalexport or Warta, would enable them to make more precise valuations of the GSM operators. Neither Era nor Plus releases regular financial data, so equity valuations are estimates based on the revenue performance of Western European operators.
And some analysts question the reliability of those valuations. "We've seen some wonderfully optimistic valuations by some major (brokerage) houses," lapinski said. "But without hard financial data, those are estimates based on estimates and assumptions based on assumptions."
Valuations of the GSM operators differ dramatically between investment banks and brokerage houses. For instance, Merrill Lynch estimated in February that Era GSM had a total market valuation of $700 million, based on expected cash flow from current and future subscribers. Just two months later Merrill Lynch more than doubled that valuation to $1.8 billion (Merrill Lynch assumes that Plus GSM has a similar value)
"We made a dramatic revision, partly because of Era's subscriber growth and partly because global telecom valuations have increased very significantly," said Stephen Pettyfer, an equities analyst with Merrill Lynch in London.
But Merrill Lynch seems bearish compared to HSBC Securities, the brokerage arm of HSBC Investment Bank in London.
HSBC calculated that the average European cellular subscriber generates $2,758 in earnings. Assuming Era GSM and Plus GSM will each have 1.1 million subscribers by 2000 (up from their current 400,000 subscribers each), HSBC estimates the companies have a market value of $3.307 billion each, according to a May 8 report.
A "more conservative valuation" (based on sales revenues from less successful cellular operators) suggests a market valuation of $3 billion for each of the operators.
"Generally, these (shareholders) could fetch a very high price if they chose to pursue that path (selling their shares)," said Dobak of CS First Boston, which also values Era GSM to be worth $1.8 billion.
GSM shareholders stand to make handsome profits by selling their shares based on those market valuations.
Assuming that Plus GSM is valued at $1.8 billion (estimate by Merrill Lynch and CS First Boston), then Stalexport's 5.5% stake in the firm is valued at nearly $100 million. Assuming that Plus GSM is valued at $3 billion (HSBC's conservative estimate), then Stalexport's stake is worth $165 million.
"It's possible that (by selling) we could get a large sum of money that could be used for other purposes," said Koziel, who refused to speculate on when Warta might sell its stake in Era GSM.
But some analysts warned investors against putting too much trust in these recent valuations. "These figures are based on subscriber figures. But how do we know whether the growth in subscribers will translate into a growth in earnings?" asked lapinski of Deutsche Morgan Grenfell. "We won't know until we see some reliable financial data."
"We are under tremendous pressure to sell our shares," said Tomasz Koziel, analyst and adviser in the capital investment department at Warta, which owns a 4.1% stake in Plus GSM.
"Valuations have gotten so high that even a small piece of this cake has become very, very valuable," added a source working close to the management board of Stalexport, a steel producer that owns 5.5% of Plus GSM. "The option (of selling Plus shares) is now under discussion by management."
Brokerage houses estimate that Stalexport's stake in Plus GSM could be worth $100 million to $180 million, while Warta's stake in Era GSM is potentially worth between $70 million and $135 million. But analysts said those are only rough valuations based on the performances of Western European cellular operators; the true value of these shares won't be known until a sale is complete.
"A (share) sale would finally enable us to make a better estimate of what these GSM (operators) are worth," said Zbigniew lapinski, an analyst with Deutsche Morgan Grenfell, which is monitoring Elektrim, an industrial conglomerate that owns 32.5% of Era GSM.
Era GSM and Plus GSM have 820,000 subscribers combined, about 35% more than at the end of 1997. The soaring subscriber figures have prompted major brokerage houses to dramatically increase their estimates of the equity value of these two operators and the stakes owned by their shareholders. "With the valuations going up like this, now might be an excellent time to sell," Koziel said.
"We never saw GSM as a long-term investment. We knew we would sell our shares when we felt the time was right," said the source close to Stalexport, who did not want to be named.
Selling out "makes sense" for Stalexport, which could use the proceeds to upgrade some of its steel mills, said Michal Dobak, vice president and member of the management board of CS First Boston in Poland. "Generally a company should focus on what it does best. Stalexport is in the steel business, not the telecom business," he added.
Analysts said such a share sale, from either Stalexport or Warta, would enable them to make more precise valuations of the GSM operators. Neither Era nor Plus releases regular financial data, so equity valuations are estimates based on the revenue performance of Western European operators.
And some analysts question the reliability of those valuations. "We've seen some wonderfully optimistic valuations by some major (brokerage) houses," lapinski said. "But without hard financial data, those are estimates based on estimates and assumptions based on assumptions."
Valuations of the GSM operators differ dramatically between investment banks and brokerage houses. For instance, Merrill Lynch estimated in February that Era GSM had a total market valuation of $700 million, based on expected cash flow from current and future subscribers. Just two months later Merrill Lynch more than doubled that valuation to $1.8 billion (Merrill Lynch assumes that Plus GSM has a similar value)
"We made a dramatic revision, partly because of Era's subscriber growth and partly because global telecom valuations have increased very significantly," said Stephen Pettyfer, an equities analyst with Merrill Lynch in London.
But Merrill Lynch seems bearish compared to HSBC Securities, the brokerage arm of HSBC Investment Bank in London.
HSBC calculated that the average European cellular subscriber generates $2,758 in earnings. Assuming Era GSM and Plus GSM will each have 1.1 million subscribers by 2000 (up from their current 400,000 subscribers each), HSBC estimates the companies have a market value of $3.307 billion each, according to a May 8 report.
A "more conservative valuation" (based on sales revenues from less successful cellular operators) suggests a market valuation of $3 billion for each of the operators.
"Generally, these (shareholders) could fetch a very high price if they chose to pursue that path (selling their shares)," said Dobak of CS First Boston, which also values Era GSM to be worth $1.8 billion.
GSM shareholders stand to make handsome profits by selling their shares based on those market valuations.
Assuming that Plus GSM is valued at $1.8 billion (estimate by Merrill Lynch and CS First Boston), then Stalexport's 5.5% stake in the firm is valued at nearly $100 million. Assuming that Plus GSM is valued at $3 billion (HSBC's conservative estimate), then Stalexport's stake is worth $165 million.
"It's possible that (by selling) we could get a large sum of money that could be used for other purposes," said Koziel, who refused to speculate on when Warta might sell its stake in Era GSM.
But some analysts warned investors against putting too much trust in these recent valuations. "These figures are based on subscriber figures. But how do we know whether the growth in subscribers will translate into a growth in earnings?" asked lapinski of Deutsche Morgan Grenfell. "We won't know until we see some reliable financial data."
