Financial Times 11/20
Rough touch
The die is cast. After a month of circling Mannesmann, Vodafone AirTouch has reached the point of no return. There is still a tiny chance that the German company's supervisory board will recommend Vodafone's E120bn offer. It is more likely that this battle will be fought to the bitter end.
By declaring its offer final, Vodafone seems to have denied itself the opportunity to improve the terms in exchange for a recommendation. If a white knight emerged, this could conceivably change. But that does not seem likely. None of the potential counterbidders - such as SBC, MCI WorldCom and British Telecommunications - enjoys as good a strategic fit as Vodafone. So this battle is likely to be determined by whether Mannesmann shareholders like the offer.
The German company's shares closed at a 17 per cent discount to the value of the offer yesterday, suggesting scepticism about Vodafone's chances of success. This is an all-share bid, so Mannesmann's shares would trade exactly in line with the bid if the market was certain the deal would go through.
One way of seeing why Vodafone has not delivered a knock-out blow is by doing a sum-of-the-parts valuation. First, look at Mannesmann's mobile business - not including Orange, which it is on the point of buying but which Vodafone does not want. This business generates about 40-45 per cent as much cash flow as Vodafone's own mobile business and the two have roughly the same growth prospects. But there is one big difference: the German company controls a larger portion of its assets and so should theoretically command a premium rating. Taking this into account, the business is worth perhaps half of Vodafone or E73bn.
Second, look at Mannesmann's other assets - Orange, its fixed telecoms business and its engineering companies. These in total are worth perhaps E70bn, producing an enterprise value of E143bn. Subtracting E26bn debt gives a value for Mannesmann's equity of E117bn - not much below the value of Vodafone's offer.
But this does not mean Vodafone's offer contains no upside for Mannesmann shareholders. First, the combination of the companies will itself create value. This value creation goes beyond the hard synergies identified by Vodafone and comes from creating a platform for the future wave of mobile data services. True, some value will also be destroyed because of the need to spin off Orange. But the net value creation still looks sizeable - and since Mannesmann shareholders will own nearly half the enlarged group, they will receive a large chunk of it.
Second, it is doubtful Mannesmann would trade in line with its sum-of-the-parts value if Vodafone's bid failed. It is more likely that it would trade at a discount - as it did before Vodafone's interest materialised. In sum, the bid has definite attractions but it is touch and go whether it will succeed. |
