Can Mannesmann Wriggle Away?

CEO Esser, a master dealmaker, could yet find a way to foil Vodafone's $134 billion bid

The clock is ticking for Europe's most embattled CEO, Mannesmann boss Klaus Esser. He has just a few weeks left to repel a $134.5 billion hostile takeover bid by Vodafone AirTouch PLC. But Esser, fresh from his own $46 billion telecom takeover spree in 1999, may yet try one more big deal that could keep him independent--or hike the price of a takeover to an even richer level. And that deal would involve another high-stakes player in Europe's telecommunications industry, Jean-Marie Messier, chief of French conglomerate Vivendi.

In a New Year's Eve interview in Mannesmann's darkened Dusseldorf headquarters, Esser disclosed that he has been talking with Messier and waxed eloquent about their shared strategic vision. Esser did not disclose what a deal would look like. But analysts and bankers say one scenario involves Mannesmann acquiring control of Cegetel, Vivendi's French telecom business. As part of this Grande Entente, Paris-based Vivendi would have a free hand in selling Mannesmann's phone subscribers an Internet access service.

The result: the first Europewide portal for the mobile Internet, a huge coup for Messier. And what about that pesky Vodafone bid for Mannesmann? Well, landing Cegetel would give Esser control of top mobile phone players in Europe's four biggest economies. And such a bold stroke might just convince Mannesmann shareholders that Esser has a strategic vision for the Internet that far exceeds anything Vodafone has, and that Mannesmann will create a lot more wealth if it stays independent. "All Esser and Messier have to do is announce that they'll do a deal like this if the Vodafone deal doesn't happen, and [Vodafone CEO Chris] Gent is blown out of the water," says a prominent investment banker and top player in European telecoms.

A Mannesmann-Vivendi linkup would be a stunning final act to Europe's biggest takeover drama yet. But in this play, the script is being rewritten daily, and there's absolutely no guarantee that Esser can pull this off. Both sides certainly sound willing. "Vivendi is our closest ally," says the 52-year-old Esser. "We've had similar strategic views of what could be done." Is a deal imminent? "From today's perspective, no," says Esser. But he adds with a smile, "in this industry, things sometimes happen in a week." Vivendi would not comment. But Messier is also anxious to cut an agreement involving Cegetel soon, says a source close to him. Vivendi, which is dogged by takeover rumors these days, has been unable to dislodge France Telecom as France's Internet power. A Continental deal is the kind of daring flank maneuver Messier would like.

Fine and good. But talking is hardly the same as doing, and Gent does not seem alarmed by the rumors. Even if Esser pulled off the deal, Vodafone might just up its bid. Messier may still be angry at Esser for his surprise bid for Orange PLC, the British cell-phone operator Mannesmann acquired last fall. Even some members of the Mannesmann camp say that such a linkup would be fiendishly complicated to pull off, given the involved ownership structure of Cegetel. The bankers also say Esser is trying other deals.

Esser is clearly contemplating some bold act before Vodafone's offer expires Feb. 7. Even Gent, already blindsided once by Mannesmann's purchase of Orange, figures Esser is plotting something. "I suspect he will try to produce something in the Internet field," Gent says, talking by mobile phone from a cricket match in South Africa (box, page 22).

A last-minute deal would be very much in character for Esser. Bespectacled and thin, he doesn't look like a macho dealmaker. A Mannesmann lifer who studied law and once headed the company's tax department, Esser strikes outsiders as stiff and colorless. But over the past six years, Esser has unleashed a flurry of transactions to transform Mannesmann from a rust-belt pipemaker to a highflier in global telecoms. It executed some 30 acquisitions from 1995 to 1999, while selling 59 units.

Many of the deals went unnoticed, while others were decisive. In July, 1996, for example, a group led by Mannesmann paid about $525 million for control of a fiber-optic network belonging to railroad Deutsche Bahn. At what now seems like a bargain price, the transaction made Mannesmann the leading competitor to Deutsche Telekom, with both fixed and mobile service. Soon, Mannesmann's D2 cell phone service grabbed the No. 1 spot from Deutsche Telekom.

But outside Germany, Mannesmann mostly owned minority stakes. Meanwhile, predators were circling. Mannesmann needed to get bigger fast to avoid being shark bait.

The opportunity came last January, when Olivetti CEO Roberto Colaninno called Esser, looking for help. To pull off his planned $33 billion takeover of Telecom Italia, he needed cash. He also faced antitrust problems if he held on to mobile phone operator Omnitel after landing Telecom Italia. So in June, Mannesmann paid Olivetti $7.8 billion to take control of Omnitel and its fixed-line affiliate, Infostrada. In a stroke, it became the No. 2 phone company in Italy.

The ever-hungry Esser kept going, snapping up the German telecom unit of utilities RWE and Veba. But Britain was still a big hole in Mannesmann's map. To outsiders, Vodafone was the natural solution. The two became partners after Vodafone bought AirTouch in January and inherited stakes in Cegetel's mobile network and D2. Vodafone didn't discourage speculation that a merger with Mannesmann was in the works.

NO REPLY. But Esser had other plans. He regarded Vodafone as a threat because it already owned a stake in Germany's third-biggest mobile phone company, E-Plus. Vodafone couldn't simultaneously own stakes in competitors D2 and E-Plus, Esser thought.

Rather than do a deal with Vodafone to get into Britain, Esser kept his eye on its major competitor, Orange. The only problem was that Orange's 45% shareholder, Hong Kong-based Hutchison Whampoa Ltd., didn't want to sell. But in October, Esser flew to Hong Kong and met with Li Ka-shing, the legendary business mogul who controls Hutchison via his Cheung Kong (Holdings) Ltd. Esser convinced Li he'd make more money as a Mannesmann shareholder, a banker close to Mannesmann says. The price was also tempting: $33 billion in stock, cash, and assumed debt. Li accepted.

"A lot of people were interested in us," says Canning Fok, Li's top aide. "Esser gave us the best proposition."

All this came as a shock to Vodafone, whose executives believed that if Mannesmann decided on a merger, Vodafone would be the partner of choice. Now suddenly, Mannesmann was a competitor in Vodafone's home market. Vodafone had little choice but to respond with a bid for Mannesmann.

Esser says he knew the risks. Orange was simply the best partner, he says. He also denies he deliberately paid a high price for Orange to fend off Vodafone. "We always felt we wouldn't keep anything as a poison pill," Esser says. An industry analyst finds that assertion implausible. "To pay a huge premium doesn't seem like the quickest way of maximizing the value of the shares," he scoffs. In fact, Mannesmann paid more than $6,000 per subscriber for Orange, some 70% above the industry average.

Mannesmann shareholders aren't complaining too much. Company shares rose 145% in 1999. Funny that Esser's reward could be to lose his job. Somehow, though, he doesn't look too worried. Maybe, just maybe, he has another deal up his sleeve.

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