MMO2: A Wireless Wimp?

When the UK’s mmo2 PLC announced its results today, it took quite a beating on the financial markets. At one point, its share price sunk to below 40 pence ($0.58) -- down from more than 70 pence last November, when mmo2 was demerged from its former parent, BT Group PLC.

At first glance, it’s tough to see why investors took such a dislike to mmo2’s results. Granted, it lost £850 million (US$1.24 billion) for the year that ended 31 March, but its EBITDA (earnings before interest, taxes, depreciation and amortization) was much improved: It notched up £433 million ($633M), compared to a loss of £39 million ($57M) in the previous year.

Compared to the gigantic £13.5 billion ($19.7B) net loss announced yesterday by Vodafone Group PLC, that's pretty good going.

Other aspects of mmo2's results also look healthy. Revenues across the group grew by 11.5 percent to £4.28 billion ($6.25B). And the company isn't drowning in debt. It owes a mere £617 million ($902M) -- an impressive feat these days.

However, much of this sunny news is thanks to the largesse of its former parent, BT, which saddled mmo2 with a mere £506 million ($740M) of debt when it flew the coop, even though it took with it 3G licenses in the U.K., Germany, and the Netherlands worth billions of dollars. But hey, if they can't lend a hand in wiping out potentially damaging debt, what are parents for?

A major reason for the negative reaction from the financial community is the reliance of the group on its U.K. operations, which help to shore up its businesses in Germany and the Netherlands. Although customer numbers in the U.K. were up 4.7 percent to 11 million, revenues were flat at £2.75 billion ($4B) -- bad news for that all-important average revenue per user (ARPU), which fell by 14 percent to about £231 ($338) from £269 ($393), trailing that of Vodafone U.K.'s £276 ($404) and Orange UK's £247 ($361).

These disappointments come despite mmo2's best efforts. The company boosted its "active" customer base (those people that actually use their accounts) by more than 12 percent to 17.5 million, and it has slashed its costs along with every other operator. Running a tighter ship helped it record an increased EBITDA margin (the margin before you start paying for any of the costs of those earnings), up from 10.1 percent in the first half of the year to 13 percent in the second. But this does not compare well with Vodafone's 36 percent, announced yesterday.

In capital expenditure (capex) terms, the company is hoping to keep costs to a minimum through its network infrastructure buildout agreement with T-Mobile, an agreement which will see the rivals share sites and roam across each others' networks in Germany and the U.K. Last year's capex outlay was £1.14 billion ($1.67B), down 28 percent year-on-year.

At its current low share price, mmo2’s capitalization is about £4 billion ($5.85B). With 2G and 3G licenses, paying customers, and little debt on board, no wonder it's considered a prime target for an aggressive takeover bid.

— Ouida Taaffe, special to Unstrung

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