Shares of telecom company Orange (NYSE:ORAN) saw a nice two-day stretch during Wednesday and Friday's trading sessions. The company saw shares jump to new 52 week highs of $17.60 before ending the trading week at $17.49. The move comes after confirmation that Orange has formally explored selling its 50% stake in leading UK mobile operator EE. This potential sale backs up my last Orange article and sets up for future asset sales coming from the company.
Deutsche Telekom and Orange have confirmed talks to sell EE to BT Group (NYSE:BT). The companies have had "highly preliminary exploratory discussions." A deal to acquire EE by BT would make the combined company the largest fixed line and mobile operator in the United Kingdom.
EE added television as an offering earlier this year, which made the company the only one to offer a "quadruple play" of landline, wireless, broadband, and television to UK customers. This is of note as the EE quad play bundle started encroaching on BT's turf. By acquiring EE, BT could strengthen the quad offerings and also fend off a competitor. BT also offers MVNO services through a deal with EE.
BT is preparing to buy either EE or Telefonica's (NYSE:TEF) O2 unit to make its mobile operations larger in the United Kingdom. While Orange and Deutsche may end up being on the losing end of a deal if BT decides to instead acquire O2, it appears there could be a fairly decent backup plan.
Hutchison Whampoa (OTCPK:HUWHY), a large Chinese conglomerate, has entered the fold for acquiring EE or O2. Hutchison owns the UK's fourth largest mobile company in 3 Group. Reports suggest the company could make a bid soon and by doing so start a bidding war between Hutchison and BT with the winner getting one of either EE or O2 and the loser getting the other as a consolation prize. Hutchison has connections with both Telefonica and Orange. The company has a network sharing deal with EE, giving it a sense of familiarity. Hutchison also is familiar with Telefonica and the O2 brand as it bought O2's Ireland operations last year.
A sale of the company's UK interests will bring cash to Orange. What the company chooses to do with it, and how much it will receive, is still up in the air. A report earlier this year valued EE at $19 billion. With Orange's 50% stake, it could be ready to receive $10 billion if a bidding war heats up. The company could spend the money to boost its presence in African nations, where it is seeing double digit gains in subscribers. Or Orange could boost its presence and offerings in other European countries like its home of France. Other options for Orange include higher dividends and share buybacks, or retiring part of its massive $45 billion in debt.
The talks of a sale of EE will likely heat up talks of Orange's other key asset, its Middle East/Africa business. As I wrote before, Orange is open to an IPO of this segment, but doesn't see it happening in the short term. This group includes stakes in 21 carriers in the region, which counts more than 94 million subscribers. In the third quarter, the Africa/Middle East segment saw subscriber growth of 11%. This is where I see the real value in Orange and its shares. The company has confirmed this will happen, but isn't in a hurry to do it.
Shares of Orange are now up 42% in 2014. The company has been the best performing of my top ten stock picks from the beginning of 2014. With a possible bidding war and the long-term potential for the Africa/Middle East business being spun off, I think Orange is not done going up. Shares should approach $20 soon on momentum and analyst upgrades.
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