Jubilee Special: 60 Years Of Telecoms

Published in Investing on 1 June 2012

Cliff D'Arcy follows the history of BT and Vodafone.

When it comes to telecommunications ('telecoms'), Britain has led the world. For example, the world's first telephone call was made by Scottish scientist Alexander Graham Bell, while the first trans-Atlantic telegraph cable was laid in 1866, followed by the first trans-Atlantic telephone cable 90 years later.

British Telecom: a behemoth

Until the Nineties, the history of British telecommunications was dominated by a single organisation: British Telecom, now known as BT (LSE: BT-A).

BT is the world's oldest telecoms company and the first national telecoms enterprise. Its beginnings date back to the creation of the UK's first telecoms firms, notably the Electric Telegraph Company of 1846. As the world became wired up during the 'Victorian Internet' age, BT took the lead.

Until 1981, BT was a state-owned monopoly, owned by us as a division of the Post Office and controlled by the Postmaster General sitting in Cabinet as a secretary of state. Post Office Telecommunications was renamed British Telecom in 1980, before being split off in 1981.

Thus, for the first half of the Queen's 60-year reign, BT had a monopoly over our landlines. Then, keen to introduce competition into this market, the Thatcher government ended BT's monopoly on landlines. As a result, the telecoms market was opened up to competition. The first new public telecoms licence was granted in 1982 to Mercury Communications, a subsidiary of Cable & Wireless (C&W).

C&W is another venerable telecoms firm, with origins dating back to the Gutta-Percha Company established in 1847. Today, C&W exists as two separately listed companies: Cable & Wireless Worldwide (LSE: CW) and Cable & Wireless Communications (LSE: CWC) -- both of which are mere shadows of the once-great C&W.

BT as a PLC

As part of the Thatcher/Lawson privatisation programme, BT became a public-listed company in November 1984. At this time, more than half of BT's shares were sold to the public following a massive advertising campaign. Two million private investors bought discounted BT shares at the float price of 130p.

In December 1991, the government sold over half of its remaining stake in BT, reducing its holding to below 22%. Most of these remaining shares were sold in July 1993, adding another 750,000 small shareholders to BT's register.

In April 1991, British Telecom became BT, focusing on individual customers, small businesses and multinational corporations. Following its privatisation, BT expanded globally and now serves customers in 170 countries.

In June 1994, BT strode into the US, linking up with US rival MCI Communication Corporation to launch Concert, a joint venture offering a global network to multinationals. Following a merger agreement, BT held a 20% stake in MCI, which it sold for $7 billion in October 1997 to MCI's acquirer, WorldCom.

From December 2000, BT offered local loop unbundling (LLU) to other operators, enabling them to connect to households via BT's copper wires. This led to a surge in alternative landline providers, such as Colt Telecom, with scores of smaller rivals competing in this space today.

In May 2001, BT raised £5.9 billion from a rights issue, as well as selling Yellow Pages owner Yell Group (LSE: YELL). In 2003, Yell floated on the London Stock Exchange and, at its peak in spring 2007, its market value neared £5 billion. Alas, Yell is pretty much a dying company nowadays.

In November 2001, BT Wireless (later renamed mmO2 and then O2) was demerged into a separate mobile-phone business and began life as a listed company in its own right. In January 2006, O2 was bought by Spanish giant Telefónica for £17.7 billion.

BT today

BT has continued to evolve and expand since the early Noughties and now consists of four distinct divisions: BT Openreach, BT Retail, BT Wholesale and BT Global Services, all of which focus on their own markets and customers.

BT shares now trade at 207p, valuing the group above £16 billion. However, at the peak of the dotcom bubble of the late Nineties and 2000, BT shares changed hands at over £15. Despite this huge drop from their peak, BT shares have made profits for millions of owners, as well as providing a strong stream of dividends.

Right now, BT shares trade on a forward price-earnings ratio of 8.4 and offer a prospective dividend yield of 4.7%, covered 2.5 times -- ideal for income-seekers.

The innovative upstart: Vodafone

As I said earlier, BT was the UK's biggest telecoms firm until the Nineties. However, in the Eighties, a small business was formed which became so successful that it raced past BT to become a global Goliath. That business is, of course, Vodafone (LSE: VOD), which has powered forward to become one of the world's leading mobile networks.

Vodafone began life in Newbury, Berkshire as Racal Vodafone, before being renamed on 1 January 1985. In October 1988, Racal Electronics floated 20% of Racal Telecom, valuing the group at £1.7 billion. In September 1991, Racal Telecom was demerged from Racal Electronics to become the Vodafone we know today.

Spend, spend, spend

Vodafone then went on an M&A (mergers and acquisitions) spree, including buying out Talkland in July 1996, Peoples Phone in November 1996 and AirTouch Communications in June 1999, changing its name to Vodafone Airtouch at the same time. In September 1999, Vodafone merged its US mobile assets with those of Bell Atlantic Corp to form Verizon Wireless, of which Vodafone owns 45% today.

Then came one of the biggest deals in corporate history, as Vodafone made a hostile bid for German rival Mannesmann, in which it held a 35% stake. In February 2000, Mannesmann fell to Vodafone's increased offer of £112 billion, with the merger completing in April.

Since July 2000, the business has been known as Vodafone Group and it continues to innovate in the wireless world and expand internationally, moving into Ireland and Japan. A year ago, Vodafone bought out Indian partner Essar Group for $5 billion, taking full control of Vodafone Essar and triggering a tax war with the Indian authorities.

A world leader

This April, Vodafone agreed to buy Cable & Wireless Worldwide for £1 billion, but there are sure to be more big buys from Britain's 'mobile monster'.

Vodafone shares are currently 173.75p, valuing the group at nearly £86 billion, or more than five times as much as BT. At this price, they trade on a forecast price-earnings ratio of 10.7 and offer a prospective dividend yield of 5.5%, covered 1.6 times.

Who wouldn't want to own shares in this global success with 439 million customers worldwide? Frankly, for a quality business, they're going cheap!

Finally, outside of the FTSE 100, an honourable mention goes to Kcom Group (LSE: KCOM), formerly Kingston Communications, which provides telecoms services to the city of Kingston-upon-Hull. The sole municipal telephone system not to fall to BT's monopoly, Kcom became a listed company in 1999, during the dotcom boom. Today, Hull's answer to BT is worth over £350 million, making it a FTSE 250 member.

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Further Jubilee investment opportunities:

> Cliff does not own any share mentioned in this article.

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