Vodafone's Power Play

How the Vodafone-Mannesmann fight could reshape Europe Inc.

He has butted heads with industry titans, from British Telecommunications to Bell Atlantic, always coming away the winner. And in the process, Vodafone AirTouch Chief Executive Christopher C. Gent has built up a reputation as the wizard of the mobile-phone industry, a cheery Briton piecing together the world's first wireless empire. But on a recent gray morning in London, the 51-year-old Gent was in a squeeze. His $107 billion offer for his partner of a decade, Germany's Mannesmann, looked to be in trouble. Two days before a crucial Mannesmann board meeting on Nov. 19, Gent flew off to Germany once again for more frantic talks with institutional investors in both companies.

But Gent is up against an opponent every bit as wily and determined as himself. While he is aiming to create a global power in Vodafone, Mannesmann's 52-year-old chairman, Klaus Esser, is turning his onetime steel-tube maker into the mobile-phone leader of Europe. Within a day of Gent's first friendly offer, on Nov. 14, Esser signaled his resolve by suing in British court to force Vodafone's banker, Goldman, Sachs & Co., to step down, citing conflict of interest. "That was the first bullet," says a banker close to Mannesmann.

A full-blown shootout could well follow. Indeed, more and more, it looks as if Europe isn't big enough for these two aggressive mobile powerhouses to co-exist independently. Whether the struggle lasts a week or a year, one or the other seems destined to become Europe's phone king. But victory will come at a price. Gent may have to pay a big premium, up to $135 billion. That would value Mannesmann's 21 million customers at more than $6,000 each, well above the $1,000 to $2,500 most mobile-phone companies value their customers. And if a sweetened bid doesn't work, Gent will have to wage Europe's biggest hostile takeover battle yet. To stop his rival, Esser will have to persuade his board to turn down a lucrative deal--and may well compromise the company's independence by calling on a white knight. Yet another wild card would be a North American bidder, eager to capture the German market.

However it plays out, this giant cross-border takeover battle, the biggest in Europe to date, looks certain to usher in radical changes. Already, industry insiders expect that the Vodafone-Mannesmann face-off will spur further consolidation in Europe's rich but fragmented cell-phone market. Big players such as Deutsche Telekom and France Telecom will likely come under intense pressure to extend their reach across the Continent. Regional players such as Finland's Sonera and Sweden's Europolitan were especially vulnerable. "Investors clearly are expecting a bidding frenzy," says Salomon Smith Barney wireless analyst John Jensen.

The reverberations extend far beyond phones. The audacity and scope of Vodafone's all-stock bid are testaments to the supremacy of financial markets in the new Europe, as traditional barriers to competition crumble. Gent launched the bid knowing full well that while Mannesmann could round up some old-style support from German bankers, politicians, and unions, in the end the markets would likely dictate the deal. This is the cold logic reigning as Europe's markets merge with America's. It's increasingly a world where companies rise and fall with their market capitalization. The rich acquire, often with their own paper. And those with sagging stocks are vulnerable as would-be predators rifle through their financials and round up takeover teams.

The trend is already taking shape. Even before the Vodafone bid, Spain's Banco Bilbao Vizcaya Argentaria was eyeing Italy's UniCredito, while France's Seita announced plans to take over rival Spanish tobacco giant Tabacalera. In short order, American powers are sure to follow the cross-border trend, starting in the racing phone market. Stock-rich MCI WorldCom could well swoop into Europe as a white knight or a raider. And as Europe moves the Internet onto cell phones, deep-pocketed outsiders from Microsoft Corp. to Japan's NTT DoKoMo could buy their way into Europe's mobile web.

MINUTES INTO MONEY. Naturally, the process is racing fastest in cell phones. Fast-growing mobile phones are the heart of Europe's new economy, thanks to its $92 billion bulk and the irresistible allure of the Internet. By the end of next year, European phone companies are betting that they will be selling millions of customers a host of data services, from electronic plane tickets to soccer highlights, over their cell phones. Anticipation of this market, which should boost e-revenues to $124 billion by 2001, is driving up stock prices. Vodafone's shares have more than quadrupled in the past two years, while Mannesmann's have quintupled in the same period. Raging stocks provide cellular stars with currency for takeovers.

In the case of Vodafone-Mannesmann, though, it's a clash between two predators. Gent strides into the contest as the heavyweight. Fresh from his successful $62 billion takeover of San Francisco-based AirTouch Communications, which closed in July, he boasts global credentials and a market capitalization of $136.7 billion, 1.7 times Mannesmann's. The company has consistently met its earnings targets and is on track to deliver profits of $2.3 billion for 1999, vs. $590 million for Mannesmann. Gent has proved to be a master of turning cellular minutes into money. Mobile-crazed Britain, where he leads British Telecommunications PLC, is his most profitable market. But Vodafone has turned quick profits in nearly all of its far-flung ventures, from Egypt to South Africa.

A STEP BEHIND. Gent has managed to stay at the forefront of the rapidly changing wireless business. Vodafone was a pioneer in creating Europe's unified cellular standard early this decade. Vodafone AirTouch was also the first operator to reach an agreement on a standard for the third generation of mobile phones. To Gent's credit, Mannesmann shareholders seem to support a potential merger. Mannesmann's stock is up 35% since news of the offer first leaked.

Still, Gent, a former marketing manager who triumphs in operations, has proved to be a step slow in the takeover wars. His biggest coup was AirTouch. But he wasn't spurred into action last January until Bell Atlantic Corp. issued its $45 billion offer for the cellular company. Gent, traveling in Australia, pieced together a far richer cash and stock offer and landed the prize.

AirTouch provided a base in North America, a crucial piece in Gent's global scheme. But in Europe, he still had only minority shares in national markets. The solution, of course, was to buy Mannesmann. But Gent waited. Bankers close to the companies say Gent and Esser secretly negotiated a merger for months--which Vodafone acknowledges but Mannesmann denies.

CELLULAR JEWELS. Esser certainly knew Gent would come knocking sooner or later, and he rushed to extend his holdings in Europe. Last spring, as part of Olivetti's buyout of Telecom Italia, he picked up controlling shares in Italy's No. 2 cellular and wired phone companies, Infostrada and Omnitel Pronto Italia, for $7 billion--a bargain by today's standards. With further acquisitions in mind, he moved to boost his stock price in September by announcing a decoupling of the company's hot telecom division from its steel machinery business.

Gent, say Vodafone officials, was waiting for Esser to break up the company before making his move. But Esser pounced first. In October, he took the battle right to Gent's turf by buying Orange PLC, Britain's third cell-phone company, for $32 billion. This stunned Gent. Says Arun Sarin, Vodafone AirTouch's CEO for the U.S. and Asia: "Our view was that we're partners, so we thought he'd come to us." Instead, Esser picked a fight.

Over the next two weeks, Gent and his team put together a response, the $107 billion stock offer for Mannesmann. The offer, which Gent delivered personally to Esser in a 2 1/2-hour meeting in Dusseldorf on Nov. 14, calls for spinning off Orange and floating the industrial unit under the Mannesmann name. The cellular jewels--market leadership in Germany and No. 2 in Italy--"would establish Vodafone as an unassailable powerhouse in Europe," says Bob House, a London consultant for Renaissance Business Strategy Group, a Boston consultancy.

For Gent to win the prize, though, it looks as if he'll have to pile on more money in a hurry--or gird for a long and nasty scrap. Esser may look beyond the markets for backing from German banks and unions. And he can delay Vodafone's bid with legal challenges. But the battle will likely be won or lost in the calculators of hard-headed fund managers. Victor Moftakhan, head of a $5.9 billion telecom fund at DGZ-DekaBank, says few of his colleagues will be swayed by appeals for patriotism. "They're not interested in German industrial history. They're interested in returns," he says.

For now, Esser is sticking to a simple argument: Mannesmann, he says, is a better growth candidate than Vodafone. Sitting in his office high above the Rhine River in Dusseldorf, the executive pooh-poohs Gent's global strategy. "Their portfolio is scattered across the world," he says. By contrast, Mannesmann is concentrated in Europe. And while Vodafone is wireless only, Mannesmann is also building its wireline businesses in Germany and Italy. This, says Esser, is key to providing a combination of services, from mobile to broadband Internet connections.

Esser insists that he has not yet contacted potential white knights for the battle against Vodafone. But if the combat heats up, both sides could enlist powerful outsiders. A logical ally for Vodafone would be Bell Atlantic. The New York company agreed last summer to partner with the British company in the U.S. market. By jiggering the agreement, which still isn't final, the U.S. company, say bankers, could add some money to Vodafone's bid. Mannesmann, analysts say, could benefit from any rich American company, from MCI WorldCom to Bell South.

A position in Europe could be a godsend for American phone companies. It would permit them to offer transatlantic service, a strong selling point for business travelers. More important, Europe is two years ahead of the U.S. in developing mobile access to the Internet, a market that could grow to 300 million users within three years, according to International Data Corp. American companies that develop services and brands for cellular businesses in Europe could gain a leg up in the U.S. market.

How will the Vodafone-Mannesmann clash play out? The fight could prove to be bitter. But that's what happens when two strong-willed CEOs with clear visions run up against each other, and when leadership of one of the world's hottest and fastest-growing markets is at stake. Scary valuations, life-or-death risks, mammoth takeover battles. Across the Continent, they're becoming more common as every week passes. Europe Inc. may never sleep soundly again.

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