Mega-merger talk buzzes with Vodafone-Mannesmann

February 8: Telecoms merger mania has taken a break in last few weeks, but talk is already focusing on what could be the next blockbuster...

February 8: Telecoms merger mania has taken a break in last few weeks, but talk is already focusing on what could be the next blockbuster 8212; Vodafone Plc and Mannesmann AG. Neither group has indicated interest in a merger, and clearly Vodafone for now must complete its 66 billion acquisition of AirTouch Communications Inc.

Analysts believe potentially enormous synergies and existing partnerships between two of Europe8217;s most dynamic telecoms groups could eventually push them to become one. quot;It8217;s distinctly possible,quot; said John Tysoe at SG Securities in London. quot;To me it makes such clear sense.quot;

ABN Amro8217;s Andrew Moffat was thinking along the same lines. In a recent report, he said a Vodafone bid for Mannesmann was one of three possible outcomes of further integration in Europe8217;s telecoms sector. quot;In the medium term, one could argue that it would make strategic sense for Vodafone to buy out Mannesmann,quot; he said.

Another possibility was a bid for Mannesmann by a third company, which could in turn force adeal with Vodafone, Moffatt said. A third outcome had Mannesmann going alone, working to release further value from its telecoms units. Another analyst, who did not want to be identified, said Vodafone-Mannesmann partnerships in three key mobile phone groups would force them to remain very closely aligned 8212; and possibly to merge outright.

quot;Together they could be a global giant, not just a European giant,quot; he said. Vodafone and Mannesmann both declined to comment. But analysts said the case for a tie-up was compelling. First, the AirTouch acquisition will make Vodafone and Mannesmann partners in two of the most profitable mobile carriers in in the world 8212; Mannesmann Mobilfunk GmbH, Germany8217;s top cellular carrier, and Omnitel Pronto Italia, the second largest in Europe. In France, each owns stakes in Societe Francaise du Radiotelefon.

Potential synergies go beyond these three countries. With AirTouch, Vodafone has mobile ventures covering 95 per cent of the European Union, with No 1 or No 2 positions inBritain, Spain, the Netherlands, Belgium, Sweden and Portugal. It also has ventures in Australia, Japan and Africa as well as AirTouch8217;s vast operations in the United States.

Mannesmann has fixed-networks that could complement the mobile side 8212; Arcor in Germany and stakes in France8217;s Cegetel, Italy8217;s Inforstrada and Austria8217;s Telering. It was left without a key international partner when ATamp;T Corp pulled out of Arcor last year.

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Analysts suspect Mannesmann could attract other suitors 8212; a US Bell company, MCI Worldcom Inc, British Telecommunications Plc or may be Cable amp; Wireless Plc.

Vodafone likely has preemptive rights on Mannesman stakes in the jewels they share 8212; Omnitel, Mobilfunk and SFR. quot;Vodafone is the buyer who would make best sense,quot; Tysoe said. A merger would yield a giant, with fixed assets of roughly 31 billion, about the same as BT, twice BT8217;s sales at about 26 billion, and market capitalisation in the range of 150 billion.

Not everyone buys into the idea. John Jensen at SalomonSmith Barney said cellular king Vodafone may not want to cross into capital-intensive fixed-line networking. Moreover, it8217;s doubtful Mannesmann would sell now, or takeless than a very steep price. On Friday, its shares closed at 121 euros 8212; 73 Times estimated 1998 earnings.