NTT DoCoMo plans US listing to fund acquisitions

NTT DoCoMo sets its sights on the New York Stock Exchange.

NTT DoCoMo, Japan's biggest mobile phone company, says it is seeking to sell shares in the US as soon as possible to help raise money for acquisitions, boost its brand and broaden its shareholder base.

The Tokyo-based company, whose i-mode mobile internet service has taken Japan by storm, is fast running out of cash to finance its expansion. Today DoCoMo announced it would pay $9.8 billion for a 16% stake in AT&T Wireless, the third-biggest mobile operator in the US. It also said it would pay NT$17.1 billion ($517 million) for a 20% stake in KG Telecommunications, Taiwan's third-biggest wireless company.

DoCoMo's international expansion comes as it heads towards saturation point in its home market. DoCoMo had 33 million subscribers, or nearly 60% of the country's mobile phone market at the end of October. Mobile market penetration in Japan is about 55%. DoCoMo's closest competitor, DDI Corp. (known as KDDI), had about 14 million subscribers, or 25% of the market.

"We are currently discussing a listing on the New York Stock Exchange," says Hiroaki Nishioka, DoCoMo's chief financial officer. "But we are still in the process of learning about various issues related to that, such as disclosure. It won't be within a week or a month but we do hope to list at an early stage." He said the company would prefer to list on the NYSE rather than Nasdaq because the NYSE is more "traditional".

So far DoCoMo has made no wholesale takeover of a foreign company. It has limited itself to minority stakes. Right now, the company says, it doesn't have the international management skills to run an overseas company. But it concedes its minority stake strategy leaves it vulnerable to more aggressive competitors.

"We are fully aware of these risks, and of the disadvantages of being a minority shareholder," Nishioka says. "This minority investment strategy is not going to continue forever."

DoCoMo says it plans to finance its acquisition of AT&T Wireless and KG Telecom through bank borrowings, but might issue new shares or debt if needed. Many analysts expect the company to issue new shares in Japan early next year.

In the meantime DoCoMo says it needs to resolve a mismatch in its existing borrowings. The ratio between the company's long-term debt and its short-term debt is about 50-50, the company says. The mismatch has occurred because it is using short-term loans to pay for long-term overseas investments. To acquire a third-generation (3G) license in the UK, for example, it used a combination of cash and short-term bank loans. Now it's considering turning its short-term loans into long-term loans. The company's medium-term debt-to-equity target is 30%.

In the wake of DoCoMo's acquisition announcements, Standard & Poor's reiterated its "AA" rating on DoCoMo's long-term debt, saying it has "adequate capacity to finance the proposed acquisitions and still preserve its current credit quality". Moody's Investors Service also confirmed its "Aa1" rating on DoCoMo's debt. While some investors fear the cost of its acquisitions will hurt DoCoMo's earnings, analysts say the borrowings would lower DoCoMo's net earnings by just 3%.

Running low on cash

Even though DoCoMo expects to be able to fund its planned Y1 trillion a year in capital expenditure with cash, it needs additional funds to pay for acquisitions. Over the past two years it has spent most of its cash repaying bank loans, and analysts expect it will run out by the end of March 2001. The company says it may also raise funds by issuing new bonds in Japan and overseas.

DoCoMo will pay $23.50 a share for the equivalent of 406 million AT&T Wireless tracking stock. The tracking stock will be turned into common stock by the middle of next year, AT&T says. Companies create tracking stocks to help put a value on a particular segment of their business without actually creating a separate entity. AT&T still holds an 84% stake in AT&T Wireless. DoCoMo, which is 67% owned by former Japanese phone monopoly NTT, also received 5-year warrants to buy an additional 41.7 million shares of AT&T Wireless tracking stock at $35 each.

At $23.50 a share DoCoMo is paying a premium of 30% over the close Thursday of AT&T Wireless tracking stock at $18. AT&T Wireless has an enterprise value (market capitalization plus net debt) to subscriber value of $3,000, analysts estimate. DoCoMo is paying the equivalent of $4,000, or a 33% premium, for its AT&T stake. According to Jake Lynch, analyst at Chase JF, DoCoMo itself had an enterprise value (EV) to subscriber value of $9,209 in the fiscal year ended March 30, 2000, and is expected to have an EV to subscriber value of $8,211 in the year ending March 30, 2001.

Under its agreement with KG Telecom, DoCoMo will pay NT$55 a share for 310.7 million shares, or 20% of the company. DoCoMo, which is hoping to form partnerships with Chinese telecom companies (it was beaten out by Vodafone in an attempt to acquire a 2% of China Mobile, the country's biggest mobile phone operator), says it's not concerned that by teaming up with a Taiwanese company it could hurt its chances of forming partnerships in China.

"We are not the first company in the world to create a relationship with Taiwan and at the same time be interested in creating a relationship with China," says Keiji Tachikawa, DoCoMo's president and chief executive officer. "Even though Taiwan is not recognized as a nation by the United Nations, when we look at their economy it is regarded as a country and many businesses enter that market."

Quiet persuasion

DoCoMo's aim is to persuade its partners to build 3G networks based on wideband code division multiple access (W-CDMA), a 3G standard that supports its i-mode services. i-mode, which was launched in February 1999, gives users "always on" access to more than 25,000 specially formatted web sites. The "packet switched" as opposed to "circuit switched" technology allows DoCoMo to charge users for the amount of data they download, rather than the amount of time they spend online. i-mode, which offers e-mail and chat services, horoscopes, news, songs and animated cartoons, has proven hugely successful with Japanese teenagers and young adults. Now DoCoMo wants to export its i-mode platform around the world.

That means, initially, persuading as many networks as possible to accept the W-CDMA standard used in Japan, Europe, Korea and parts of the US, as opposed to the cdma2000 standard being promoted by US-based technology company Qualcomm that's likely to be used in large parts of North and South America. In some big markets the two systems may operate side-by-side and users may be able to roam between the two.

DoCoMo plans to develop internet services based on a future AT&T Wireless network using W-CDMA technology. The company also plans to develop dual-browser handsets that can accommodate users accessing websites through i-mode or through rival WAP (wireless application protocol). i-mode and WAP use different computer languages to format web sites for mobile devices.

DoCoMo will gain a seat on the AT&T Wireless board and will have the right to appoint the chief technology officer, subject to approval by AT&T Wireless.

"For NTT DoCoMo, the investment is part of an ongoing strategy to promote its mobile portal platform and create new opportunities for growth of its mobile network and mobile portal platform business in the global marketplace," the company said in a statement.

AT&T Wireless, which has 15 million subscribers, will gain access to DoCoMo's experience in running a mobile platform and enable it to maximize the value of its network by providing value-added services tailored to its subscribers.