| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Cashing In on the Net (int'l edition) Europe's phone giants are rushing to spin off their hot units as IPOs Even in an era of turbocharged Internet stocks, it was an astounding takeoff. When Spanish phone company Telefonica spun off its Internet unit Terra Networks last month, Terra shares more than tripled on their first day of trading in Europe and the U.S. Now valued at more than $10 billion, Terra has roared past Britain's Freeserve PLC to become Europe's biggest Internet company. It won't remain No. 1 for long, though. Other European telephone companies are planning Internet spin-offs that would dwarf Terra. Two of the largest offerings, from Deutsche Telekom and Telecom Italia, will probably be out of the blocks in the next six months. These initial public offerings will rev up the nascent market for European Internet stocks, bringing some of the sector's biggest players out of the shadows of their corporate parents and into the arms of investors. What's more, the IPOs will hasten the transformation of the telephone business in Europe. Former phone monopolies, now facing tough competition at home, can't survive unless they push into new territory and new lines of business. Spinning off their fastest-growing holdings, such as Internet and mobile-phone units, generates cash for such expansion. By keeping a controlling stake in these spin-offs, phone companies also can boost their own share prices, fortifying their defenses against possible takeover bids. Shares in Telefonica, which owns 67% of Terra, jumped 30% in the weeks before the IPO and have climbed another 12% since then. And, as Vodafone AirTouch's $128 billion hostile takeover bid for Mannesmann illustrates, telecommunications companies will need ever-bigger war chests to survive as global players. But ironically, by spinning off their fastest-growing businesses, the phone companies could be creating offspring that will one day overshadow them, and might even swallow them up. For the short term, though, the Internet has created a treasure trove for Europe's companies. Unlike in the U.S., where startups such as America Online Inc. led the move onto the Web, in Europe the dominant Internet-access providers are phone companies. Deutsche Telekom is the Continent's biggest provider, with 3.6 million subscribers to its T-Online. Other national phone companies such as France Telecom and Tele Danmark enjoy commanding leads in their markets, too. In fact, phone companies are among the few companies in Europe already making money from the Internet. True, Internet-service providers such as T-Online aren't profitable yet. But because local calls in Europe are billed by the minute, phone companies rake in revenues every time a customer logs on to the Net. Their extensive networks and brand recognition have given them an edge in scooping up contracts for corporate data-transmission, too. Investors are clamoring for a piece of that action. Shares in Tiscali, a regional phone company that pioneered free-subscription Internet service in Italy, have soared 271% since the company launched an IPO in late October. On Nov. 9, a joint Internet venture by Dutch phone company KPN and U.S.-based Qwest Communications International Inc. celebrated a sizzling debut on stock exchanges in Amsterdam and New York. Shares rose 50% in one day. ''As an investor excited about the future of the Internet, you don't want to buy a lot of other things. You want pure Internet,'' says Jack McMaster, chief executive of KPN-Qwest. All that helps explain the eye-popping valuations being tossed around for phone companies' Internet ventures. Deutsche Telekom's market capitalization is $175 billion. Market watchers reckon its T-Online will be worth $16 billion to $20 billion if Deutsche Telekom spins it off, as the company is considering doing next year. That's more than the market capitalization of such industrial giants as Groupe Danone, British Aerospace, and Rhone-Poulenc. What would the phone companies do with all that money? Deutsche Telekom, for one, says it will plow the proceeds into acquisitions, to strengthen its hand in foreign markets. Olivetti, which took over Telecom Italia in June, might pay off some of the $16 billion debt it incurred in that deal. France Telecom says it has no plans to spin off its Internet-service provider Wanadoo, which has clobbered aol and other competitors in the French market. Maybe not now--but the situation could change if France Telecom needs money for an acquisition. Not everyone is a winner when phone companies try to spin off their hottest businesses. In Latin America, where Telefonica has taken large stakes in several national phone companies, it has sparked an uproar by trying to sell those companies' Internet holdings to Terra Networks. Minority investors in Chilean phone company Compania de Telecomunicaciones de Chile (CTC) are threatening to sue CTC and Telefonica, contending that an Internet-service provider owned by CTC was sold to Terra for far less than its market value. WHAT'S LEFT? Still, the march toward spin-offs continues apace--mirroring a trend in the U.S., where AT&T is considering issuing a separate stock for its wireless division. Portugal Telecom has just spun off its Internet unit, raising $523 million. In the Netherlands, KPN is considering a flotation of its mobile phone unit. And Telefonica CEO Juan Villalonga is forging ahead with plans to spin off businesses ranging from cell-phone service to Yellow Pages. ''In the strategic development of the company, the key has been to break up its activities and have global development of each one of the businesses,'' he says. Such talk raises the question of what will be left of the parent companies. As competition grows ever more intense, traditional phone service is becoming a low-profit business. For now, companies such as Telefonica, Deutsche Telekom, and Telecom Italia plan to keep controlling stakes in the units they spin off. But they'll be tempted to sell off more shares to raise capital, gradually weakening the link. At the same time, the spin-offs will be developing their own strategies and brand names, and growing much faster than their parents. One possible outcome: Successful offspring might eventually take over their parent companies and sell off their fixed-line telephone holdings. Indeed, some argue that the phone companies are heading in exactly the wrong direction. The best long-term strategy is to ''integrate the Internet into their core operations,'' says Lars Godell, an analyst at Forrester Research in Amsterdam. Maybe so. But phone companies, facing fierce competition and takeover threats, may feel they don't have a choice. For now, those spin-offs will keep on spinning. By Carol Matlack in Paris, with Jack Ewing in Frankfurt, Gail Edmondson in Rome, William Echikson in Brussels, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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