Telecoms Are Running Scared
Money, eventually, talks. Mannesmann CEO Klaus Esser may have gamely scheduled a road show to unite investors against Vodafone AirTouch PLC's sweetened $128 billion takeover offer, but the German company is still listening to offers from Christopher C. Gent, CEO of the British cellular giant. And even though Hong Kong-based Hutchison Whampoa, which owns 10% of Mannesmann, said on Nov. 23 that it would side with the German company, industry insiders were still betting that Vodafone would sweeten the deal and ultimately come out on top.
So Europe may be grappling with a new telecom titan very soon. The prospect already has former state phone companies scurrying in fear. If the deal goes through, Vodafone-Mannesmann will be the first Europewide power in wireless communications. It will be in a position to offer business travelers cheaper and broader service, even stretching across the Atlantic thanks to its Airtouch acquisition this year. "Vodafone could dominate the next wave of mobile growth," says Andrew Moffat, telecom analyst at ABN Ambro in London.
Few expect dealmaker Gent to stop with Mannesmann. His model, after all, is MCI WorldCom Inc.'s Bernard J. Ebbers, who runs nothing less than a stock-powered takeover machine. And even if Gent loses Mannesmann, predict sources close to the CEO, he will storm through Europe buying wireless companies from Spain to Scandinavia. Esser would hurry to match him market by market.
To protect themselves, Europe's former phone monopolies are rushing to bulk up. From Deutsche Telekom's Ron Sommer to Olivetti's Roberto Colaninno, chief executives know that a shrinking fraternity of giants will survive as international players in Europe's $200 billion communications business. Now more than ever, they have to forget about national borders and once respected barriers between cellular, traditional wire lines, and even the Internet. Instead, to make the cut, phone companies must be everywhere. And to remain on the predator side of the equation, they must relentlessly drive up their stock price.
The action is already under way. Indeed, in the last two weeks, Deutsche Telekom has gobbled up a small French phone company, SIRIS. British Telecommunications PLC is upping its investment in Germany's Viag Interkom, a Munich-based company with cellular and wireline businesses. The pool of available assets is shrinking fast as deal mania reaches new levels. "The music has started," says one Spanish telephone executive, "but there aren't too many available dancers out there."
ORANGE PLUM. By 2003, industry analysts venture, as few as three former monopolies could be sharing Europe with Vodafone-Mannesmann. And each could end up with an American partner--or even owner. For these jumbo companies, says the CEO of a European phone equipment manufacturer, "transatlantic alliances make more sense than cross-border mergers." MCI WorldCom, SBC Communications, and Bell Atlantic are all eyeing potential acquisitions.
For now, the hottest market is wireless communications, and the biggest prize likely to come along is Orange PLC, the British mobile-phone operator that Mannesmann bought for $32 billion a month ago. To push a Mannesmann deal past Brussels regulators, Gent would likely have to unload Orange. In doing so, he risks empowering a competitor. Orange provides not only a foothold in the dynamic British market but also sizable stakes in markets from Switzerland to Belgium and--equally important--a vibrant brand.
Michel Bon's France Telecom looks to be the leading candidate to land Orange. The other phone companies with Europewide ambitions--BT, Deutsche Telekom, and Vodafone--already run wireless businesses in Britain. But Bon could face competition from elsewhere, including MCI WorldCom or SBC Communications. Naturally, Gent would push for a bidding battle to drive up the price. Otherwise, with a bad deal on Orange, says a banker close to Mannesmann, "[Gent] could drive down the value of his company."
While Bon is looking to Britain, Deutsche Telekom's Sommer is hunting in France. His purchase of SIRIS, an alternative phone carrier, on Nov. 17 for $728 million provides a small platform for Europe's second-biggest market. A more tempting prize would be Vivendi, the conglomerate with rich Internet and TV holdings, as well as control of France's second cellular operator, SFR. Vivendi, which also has the world's largest water-distribution business, wouldn't come cheap, perhaps for about $70 billion. A less expensive ticket to France would be Bouygues Telecom, the third mobile provider. But Bouygues, partly owned by French tycoon Francois Pinault, is also getting pricier. Takeover rumors have driven up the stock price 25% since early November.
FIXED STRATEGY. Even as the northern powers hunt, companies in Spain and Italy are mounting defenses. Telefonica CEO Juan Villalonga is determined to drive up his stock price to ward off predators. On Nov. 17, he launched the company's Internet unit, Terra Networks, in an initial public offering. It promptly soared to a market capitalization of $10 billion. This should raise the takeover price for any company stalking Telefonica. Now, Villalonga is suggesting that more spin-offs of cellular holdings in Europe and Latin America could double the company's $60 billion market cap.
Olivetti's Colaninno is following a similar approach. Since buying Telecom Italia in a $33.3 billion deal last spring, Olivetti operates the leading cellular operation in Italy. But tarred by the ongoing battles between Colaninno and shareholders, the stock is riding low. Frustrated in his effort to restructure the company to reduce its $21 billion in debt, Colaninno is racing to spin off an Internet unit to raise cash.
As Europe's cellular survivors piece together a strategy, they can ill afford to scrimp on fixed lines. High-speed wire is still the cheapest way to transmit data, whether from cell phones, fixed lines, or computers. It has been Esser's strategy, in contrast with Gent, to build up a mixture of wire and cellular. If Gent wins Mannesmann, analysts expect him to spin off the fixed-line units as a separately traded company. But he may keep investing in that side of the business by snapping up one of the new U.S.-financed phone companies, such as Viatel Inc., that are laying vast fiber-optic networks across Europe.
For now, Gent is resisting pressure to add a cash sweetener to his all-stock offer for Mannesmann, and so add to Vodafone's $30 billion in debt. "Our currency"--the share price--"is more valuable than money," he declares. But since Gent announced his offer for Mannesmann on Nov. 14, Vodafone shares have fallen 7.8%. In demanding a richer price for his company, Esser is aiming to drive Vodafone's stock price down further--and spoil the deal.
For Vodafone-Mannesmann, the end-game may take time to play out. But frenzied consolidation in European telecommunications looks unstoppable.