PacTel Gains Access to Coveted West German Cellular Phone Market
Pacific Telesis won a stake in one of Europe’s most lucrative telecommunications markets Thursday as West Germany awarded it and other members of a four-nation consortium a license to build the country’s first private cellular telephone system.
The development could mean hundreds of millions of dollars in revenue for the San Francisco-based regional telephone company. The cellular license is widely viewed as the most attractive in Europe because West Germany’s citizens are affluent and well educated and the nation is densely populated.
PacTel holds a 26% interest in the Mannesmann Mobilfunk GmbH consortium, which prevailed over nine other international partnerships that included all the American regional telephone concerns.
The deal underscores the growing presence of U.S. telecommunications firms in the expanding phone markets of Europe and Asia. For example, US West, a regional phone firm in Englewood, Colo., this month won a contract to provide cellular service in Hungary. And with Europe planning to standardize communications operations in 1992, U.S. companies have the potential to win more lucrative contracts.
For PacTel, getting the best cellular contract in Europe before 1992 has big advantages.
“This gives them a nice entree in the European market prior to the consolidation of Europe in 1992,” said David J. Boczar, an analyst with New Japan Securities in New York. “The companies that are there prior to 1992 will have a better chance to compete.”
Although PacTel won’t realize potential profits from the license until well into the 1990s, analysts said the license immediately adds significantly to the company’s assets because the cellular industry has grown faster than expected and has prospered.
The West German license covers a market of 61 million people, and, with its 26% share, PacTel gains 16 million “pops”--a more than 50% increase in its current 30 million pops. Pops is an industry measure that refers to the number of potential subscribers. The number of pops is determined by multiplying the population of an area by the percentage ownership that a company has in a particular market.
“We view the cellular business as an ‘Alexander Bell’ opportunity,” said PacTel Chairman and Chief Executive Sam Ginn. “This license expands our reach into the international cellular market and provides significant potential for increasing share-owner value during the 1990s.”
West Germany’s Federal Minister of Post and Telecommunications selected the consortium led by Mannesmann AG to build and operate what will be the second digital cellular system in the nation. Currently, the German Bundespost operates an analog cellular network and has plans to construct its own digital system. The analog system sends voice and data on sound waves and the digital system--considered more efficient and reliable--transmits voice and information in computer language.
The consortium will establish the new cellular system and market its services, PacTel said. PacTel International has a contract with the consortium to design, engineer, and manage the construction of the new system, the company said. The consortium will spend between $1 billion and $2 billion over a 3- to 5-year period to build the system. PacTel will contribute about 26% of the cost.
The consortium includes Deutsche Genossenschaftsbank, Cable and Wireless PLC, Lyonnaise des Eaux and the National Assn. of Electrical and Automobile Trades.
West Germany is a very attractive market, similar to the United States in the mobility of its population, said Joanne C. Smith, an analyst with Nomura Research Institute in New York. The cellular penetration “should be no different than the U.S.,” she said. The system won’t detract from PacTel’s earnings in the period it will take to get it started and should provide a decent return for PacTel longer term, she said.
PacTel said it doesn’t expect the system to be operational until mid-1991.
Looking ahead five years, the system could reasonably generate about $1.8 billion a year in revenue if it gets a 3% penetration of the market, said Bradford L. Peery, president of an investment company in San Francisco bearing his name. Even with a payoff that far away, a cellular license “is an enormously valuable resource today,” he added.
The West German license is PacTel’s first international cellular venture, but it has been among the most aggressive players in the United States. With the breakup of American Telephone & Telegraph in 1984, the regional Bell companies were each awarded a cellular license in a market they served. PacTel was among those that recognized the potential of cellular and made more acquisitions, Bozcar said. It currently has more cellular pops than any of the other Baby Bell companies and is second only to McCaw Cellular Communications in total pops.
PacTel holds 82% of Los Angeles Limited Partnership, a cellular system serving Los Angeles, Orange, Riverside, San Bernardino and Ventura counties, and PacTel has a 100% interest in a system serving San Diego. The other major system in Southern California is Los Angeles Cellular Telephone, a partnership of Lin Broadcasting of New York and Atlanta-based BellSouth.
Overall, PacTel’s revenue and earnings from cellular has steadily increased. In the third quarter, the company’s revenue from cellular totaled $116.5 million, up from $80.7 million in the prior year. Operating income from cellular rose to $38.9 million from $19.9 million.
On the New York Stock Exchange Thursday, PacTel closed at $48.375 per share, up 62.5 cents. The stock has also risen earlier this week on reports that the license would be awarded.
