Investment outlook in the mobile telephony business
Introduction The level of competition in the corporate world is hot with major corporations using cut-throat schemes and strategies to increase their market share and insulating themselves from impeding business storms. Market capitalization and the hype on the stock market have intensified brand-ware wars with either company edging closer to beating the other. This subsequently has spread up the capital markets and taken toll on the equity value of the companies eating away their share value in the stock market.
The competitiveness of the brands plus the corporate supremacy struggles have implications on the investor perception about his choice of investment and with due diligence has evaluated the cost and value implication on his investments within the choice of his investment as the corporate upheavals continue their hurricane-like rape on the market capitalization. Loss of value of the shares and the sell of shares by share holders is not corporate wise safe; there is need for retention of the shareholder value within the fiscal auspice of the company.
Equity valuation, share performance and corporate bond and the corporate place within the market hence becomes dynamics within the structures and investment analysis when checking on the checks and balances in the market. O2’S corporate war with Vodafone plc and Virgin Mobile Ever since the bursting of the bubble in 2000 business ethics has been in the news. However, the fact that ethics could have a direct bearing on earnings and consequently on valuation has not been analysed much. It is estimated that somewhat more legal forms of aggressive accounting may be boosting corporate earnings by as much as 20% or even more for O2.
This would imply that valuation levels are higher than what they seem by a similar margin. Further, if people distrust the numbers they may automatically incorporate a premium a risk premium as well as a credibility premium in pricing of the assets. (Arnott, 2003) Private equities, including venture-backed investments and leveraged buy-outs are pivotal in today’s capital markets. In valuing publicly traded shares, the importance of financial statement information has been extensively analyzed, but not much research has gone into the role of accounting information in the private equity sector.
One reason for this could be the lack of readily available financial data for such businesses. Armstrong et al (2006) examined the association between financial and non-financial statement information and private equity values on either side of the IPO or highlighted that accounting information can be used to explain differences across companies in their valuations and the changes in these valuations over time. The telecommunication services industry mainly consists of 3 large players in the United Kingdom: Vodafone Group, O2s and Virgin Mobile.
For the purpose of valuation they used WACC to be at 9%, this is primarily based on Morgan Stanley’s expectations of higher bond yields plus a constant growth rate of 3% and a discount rate of 10%. This is due to the fact that 25% of Vodafone’s cash flows are to be expected from minority positions which are risky. Using discounted Cash flow model to value O2 and first i value O2 to be at 138. 6p per share which later turns to 148. 9p per share. An increase on the target price of O2 is forecasted and also a growth in service revenue from 5. 7% to 8. 1%.
Also, after the introduction of the IFRS, the EPS of O2 as I define it, which unlike Vodafone excludes license amortization, would increase in value significantly meaning O2 is less risky than Vodafone group. This places it in good stead and an increase of the share value and its bond price marginally would be in order. To value Virgin Mobile I used a multiples based model of Enterprise Value / Operational FCF of the firm. I used the multiples based model instead of the essential DCF as i saw this model to give a more realistic medium term valuation.
Virgin fitted in Vodafone’s shoes hence I decided to keep its portfolio close to that of Vodafone Group. With the cash flow expected from minority positions and the major outward sources to be more risky I concurred that my company O2 was steady and less risky and that was enough reason to lessen the value of the discount rate on the corporate bond. However, looking at demographics within the market the fiscal weather and the increased corporate activity, political weather and emerging competitive companies, investors might shift interest and even form consortium of Hedge Funds to make hostile bids on companies with likely corporate problems.
Bankruptcy would be one of the major causes of the distress, but looking at the books O2 has minimal bond repayment defaulters and there has been a significant growth of equity and share value. Vodafone Group’s diverse corporate approach has a vast negative implication and the level of defaulting is higher looking at its dynamics. O2 is conserved and has less dynamism in terms of liquidity and investment portfolio. Virgin has a similar fright-position with Vodafone. O2 is more stable and has a diversified conservative investment portfolio with less risky bond and share value. Sources 1-Yahoo finance 2- (Arnott, 2003) 3- Armstrong et al (2006).