MobilCom's Schmid: Twilight of a Titan

He is likely to lose his company to France Télécom

Other German moguls may downplay their wealth and keep their private lives hidden from view, but that's not Gerhard Schmid's style. The 50-year-old former ice hockey coach keeps a stable of racehorses, most named, in some fashion, after his telecom company: MobilCom. Schmid's wedding to his second wife two years ago was catered by staff on loan from Berlin's five-star Hotel Adlon, and capped by a show of fireworks.

The paparrazi loved it, and so did MobilCom's shareholders--at least until a few months ago. Germany's first billionaire-on-paper, Schmid was regarded by some as a national treasure. Manager magazine ranked him the 68th-richest man in Germany, alongside old-money names like the Quandts (of BMW fame). Schmid built MobilCom from a three-person outfit into a $2.5 billion operation with 10.5 million customers and 300 retail outlets. At the end of 2001, well into the telecom bloodbath, MobilCom shares were still up 800% from their initial public offering price in 1997.

Now, MobilCom is trading at just under $8, a world away from its 2000 high of $144. And it looks as if the Schmid era is all but over--the victim of a disastrous partnership with France Télécom and questionable financial dealings that shattered investors' trust. One could chalk it up as yet another dot-com boom and bust, were it not for the symbolic significance. MobilCom was the first company to list its shares on Frankfurt's Neuer Markt, and helped lure thousands of German investors to the Nasdaq clone. "The events of recent weeks have done significant damage to Germany's shareholder culture," says Dirk Unrau, a Hamburg lawyer and shareholder advocate who frequently criticized Schmid.

While many describe Schmid as a daring entrepreneur--an all-too-rare breed in Germany--it was his unwillingness to compromise that helped bring about his downfall. In March, 2000, France Télécom bought 28.5% of MobilCom for $3.5 billion. But the showy self-made billionaire and the methodical French were a poor match. "Conflict was preprogrammed," says Josef Scarfone, a fund manager at Frankfurt-Trust Investment in Frankfurt. Now, each side accuses the other of underhanded dealings. And MobilCom's supervisory board is expected to oust Schmid at a June 21 meeting.

MobilCom, meanwhile, is teetering on the verge of bankruptcy. The company hasn't been profitable since 1999. Its net loss in the first quarter more than doubled from a year earlier, to $109 million. Debt payments totalling $4.4 billion come due on July 31.

Until a few months ago, though, Schmid's life was a tale of entrepreneurial derring-do. After managing a resort on Germany's northern coast and heading marketing for rent-a-car company Sixt, Schmid set up MobilCom with two employees in 1991. The government had just started allowing independent carriers to sell services using the networks built by incumbents Deutsche Telekom and Mannesmann, now part of Vodafone PLC.

Dozens of new operators sprang up almost overnight. MobilCom started out offering mobile-phone services, but when the fixed-line business was deregulated, it jumped into that sector, too. The upstart set itself apart by offering service anywhere at any time for a flat rate of around 9 cents a minute. "Schmid had a clear strategy. The others took three months just to work out a fare schedule," says Helmut Thoma, ex-CEO of broadcaster RTL and a member of MobilCom's supervisory board.

It was easy money, but it would not last. Deutsche Telekom CEO Ron Sommer went on the offensive. He ratcheted down Telekom's rates, driving dozens of upstarts out of business. Defiant, MobilCom used its high-flying stock to acquire smaller competitors. Still, it was clear Schmid needed a new strategy--and someone to help finance it.

Enter France Télécom. After a falling-out with erstwhile partner Deutsche Telekom in 1999, the French were looking for a way into Germany as part of their plan to build a pan-European mobile network. In 2000, France Télécom and MobilCom jointly bid $7.7 billion for a license to offer third-generation wireless service in Germany. Schmid's dream was to be the first German license-holder to offer speedy 3G service, before the end of 2002.

But within months, hopes for a 3G bonanza were fading all across Europe. And Schmid was clashing with his French partners over how to respond. Rather than build a costly 3G network of its own, as Schmid wanted, France Télécom thought MobilCom should team up with other second-tier German operators. The French say they were shocked when Schmid began publicly bragging late last year that he would spend more than $9 billion on MobilCom's network. Schmid argued that France Télécom was still contractually obliged to foot the entire bill--a pronouncement that spooked the French phone company's shareholders.

Meanwhile, an even nastier fight was brewing. France Télécom alleges that Schmid's wife, Sybille Schmid-Sindram, secretly bought a 5% stake in MobilCom, in part with $65 million borrowed from the company. When the transactions were made public in February, Schmid said the shares held by his wife were for a stock-option plan to reward MobilCom's independent dealers. But France Télécom alleges that Schmid was trying to drive up MobilCom's share price as part of a scheme to enrich himself at the French phone company's expense. His gambit: That France Télécom, tired of his shenanigans, would take control of the company by buying his 40% stake--at an inflated price. "It was blackmail," says a source close to France Télécom top management. An independent auditor has indeed concluded that Schmid violated German securities law, though his actions don't constitute a criminal offense. Schmid, who declined to comment, has apologized to shareholders for his conduct.

It stands to reason that investors are angry at Schmid. But they accuse the French of provoking a public dispute with Schmid in hopes of driving down MobilCom's share price so they could buy him out on the cheap. And they say France Télécom broke its promise to build MobilCom's 3G network after the French company went on a ruinous acquisition spree. "They've reneged. This is the way the French do business," says New York-based corporate raider Guy P. Wyser-Pratte, who owns 1.1% of MobilCom.

To further complicate matters, Germany's Federal Financial Supervisory Agency is investigating possible insider trading by as-yet-unnamed parties. The suspicious trades came on June 11, hours after France Télécom announced it was unilaterally canceling its cooperation contract with MobilCom.

Meanwhile, the French are expected to work out a deal with MobilCom's creditor banks to buy out Schmid. As a consolation prize, MobilCom's founder may get to keep freenet, an Internet provider. Whatever happens, the flamboyant Schmid is sure to surface again, with another brilliant scheme. The question is whether German investors will be brave enough to follow him.

By Jack Ewing in Frankfurt and Carol Matlack in Paris

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