Mannesmann Makes Its Move

A deal for Orange would shake up the phone wars

You'd think Klaus Esser, chairman of Germany's Mannesmann, would be feeling invincible. His cell-phone company has continued to thrash Deutsche Telekom in its home market, Europe's largest. And Esser has recently acquired a lucrative cellular network in Italy. But Mannesmann, burdened by a humdrum brand name and scant investor recognition, has still limped along in the marketplace. Mannesmann, competitors quipped, was German for "takeover bait."

Now, Esser has blasted onto the offensive. On Oct. 20, he was putting the final touches on a bold $28 billion bid for Orange PLC, Britain's jazziest cell-phone operator. If the deal holds up, it gives Esser a stake in the market that's shaping up as a laboratory for the whole industry. And perhaps most important, Orange, with its spunky reputation, gives Mannesmann a hot new brand name.

The deal comes just as Europe's phone companies are preparing for radical change. As mobile phones evolve into Internet machines, phone companies will soon be selling bits of data. The challenge facing Mannesmann and Europe's other cellular kings is to build up brand names for these new services, from phone banking to video-conferencing. Says Petri Poyhonen, vice-president for mobile systems at Nokia Corp: "To survive, operators must learn to make money from data."

CLOSE BEHIND. Nowhere is the phone revolution more evident than in Britain, the world's most competitive cell-phone market. It's led by Vodafone Group PLC, the global power that took over America's Air Touch earlier this year. British Telecommunications PLC, is close behind. Eager to claw it out with them are two Germans, Mannesmann/Orange and Deutsche Telekom, which last summer dished out $13 billion for Britain's fourth mobile provider, One 2 One.

Yet until three years ago, Mannesmann, originally a maker of steel pipes, lived closer to the slag heap than to cyberspace. In 1996, Esser, a member of the management board, pushed his colleagues to invest in a fiber optic network. This led to a series of telephone acquisitions, including majority control of Italy's No. 2 player, Omnitel Pronto Italia. Only one trouble: Mannesmann's stock price, sagging under the old-line steel business, trailed the industry.

By this autumn, Esser had to eat or be eaten. So in September he announced plans to separate the telecom business from heavy industry, giving the phone operation its own stock listing. At the same time, he cranked up talks with Li Ka-shing, chairman of Hong Kong's Hutchinson Whampoa Ltd., which owns 45% of Orange.

Although it's pricey, the Orange purchase has its advantages. The company is a growth leader in Britain, with its customer base doubling, to 3 million, in the last year. Orange is also leading the race to the mobile Internet in Britain. And among a dreary collection of look-alike mobile brands, the Orange label shines brightly. "We wanted a brand name that was young, dynamic, and would cross international boundaries," says Orange CFO Graham E. Howe. Mannesmann could well export the Orange brand throughout Europe.

But Mannesmann, even with Orange on board, is still not secure as a stand-alone player. Indeed, Esser is likely to hear from his longtime partner, Vodafone CEO Christopher C. Gent. The Orange deal thrusts Mannesmann into Vodafone's home market and complicates joint ventures in Germany and Italy. "If I were Vodafone," says Deutsche Telekom CEO Ron Sommer, "I might go see Mr. Esser with a bunch of flowers and maybe a checkbook." The checkbook for sure. But in Europe's raging telephone takeover wars, there's no time for flowers.

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