Valuation of O2 mobile business

In our previous analysis we suggested that O2 was undervalued relative to the rest of the UK mobile industry, though that wasn’t our main objective. In summary, we showed that the key markets customer equity (essentially the long-term value of all customers in all key markets) was strongly correlated with the market capitalization of the company. The slope of the fit is unity; in other words the customer equity is the market capitalization, as shown by the green line in the graphs below.

[UK Mobiles: Market capitalization versus key markets customer equity]
UK Mobiles: Market capitalization versus key markets customer equity.
[UK Mobiles: Market capitalization versus key markets customer equity - detail]
UK Mobiles: Market capitalization versus key markets customer equity - detail showing Virgin Mobile and O2. The green line is the fit constrained to the origin.

However, as we see from the graphs above, for the last three years O2 has not been following the common green line but a different line of its own. That has now been corrected.

O2 had a market capitalization in April 2005 of around £10.6bn, compared with a key markets customer equity of £15.7bn, according to our numbers. The notes in the spreadsheet remarks that this estimate of customer equity is a little low but because of lack of reporting we could not include the Ireland data in our analysis.

Our estimate for the valuation of O2 that would bring it into line with the rest of the industry was therefore slightly above £15.7bn.

This week, Telefonica gave a recommended offer for the whole of O2 of £17.7bn, bringing O2 broadly into line with the rest of the industry.

Well done Telefonica for realizing the value of this company.