| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
| ||||||||
 | ||||||||
| INTERNATIONAL -- EUROPEAN BUSINESS
Euro Cell Phones: Mannesmann Calling (int'l edition) A bold bid will shake up the phone war Watching him race through an extraordinary 1999, you'd think Klaus Esser, chairman of Germany's Mannesmann, would be feeling invincible. His cell-phone company has continued to thrash Deutsche Telekom in its home market, Europe's largest. And after DT's botched raid on Italia Telecom jumbled up alliances in Italy, Esser came away with a vastly strengthened portfolio. But despite these triumphs, Mannesmann, burdened by a humdrum brand name and scant investor recognition, has limped along in the marketplace. Mannesmann, competitors quipped, was German for ''takeover bait.'' But Esser has blasted onto the offensive. On Oct. 20, he put the final touches on a bold, $30 billion bid for Orange PLC, Britain's jazziest cell-phone operator. The deal fills a vital geographic niche for Esser, giving him a stake in the market that's a laboratory for the change sweeping the industry. It also bulks up Mannesmann, making it tougher for predators to consume. Perhaps most important, Orange, with its spunky reputation and youth appeal, gives Mannesmann a heady dose of the hottest new currency in the phone business: a brand name. HOW FAR? Even as Europe's phone companies continue to stake out new turf, buying and merging and signing trans-Atlantic alliances, they're preparing for radical change in their business. Long-distance rates are plummeting. And as mobile phones evolve into Internet machines, phone companies will soon be selling bits of data. Talking minutes, long the currency of the industry, will in the early years of the coming decade disappear from phone bills. The challenge facing Mannesmann and Europe's other cellular kings is to build up a continental brand name and make a new living by selling a bevy of services, from phone banking to video-conferencing. ''There's a limit to how far the voice business can go,'' says Petri Poyhonen, vice-president for mobile systems at Nokia Corp. ''To survive, operators must learn to make money from data.'' Nowhere is the phone revolution more evident than in Britain. While the Japanese and Scandinavians are ahead in the mobile Internet, Britain, with cell-phone growth racing at an 80% annual clip, is by far the world's most competitive market. It's led by Vodafone Group PLC, the global power that took over America's Air Touch in a $62 billion deal earlier this year. British Telecommunications, linked by a global alliance to AT&T, is close behind. Eager to claw it out with them are two Germans, Mannesmann/Orange and Deutsche Telekom, which last summer dished out $13 billion for Britain's fourth mobile provider, One 2 One. ''If these Europeans can develop lucrative data services,'' says Victor Moftakhar, a manager at Frankfurt's Deka-TeleMedien Fund, ''they can get a lead over traditional American operators.'' SAGGING. Until three years ago, Mannesmann lived closer to the slag heap than to mobile cyberspace. The Dusseldorf company grew as a maker of steel pipes and auto parts. But in 1996, Esser, a member of the management board, pushed his colleagues to invest in a fiber optic network. This led to a series of phone acquisitions across Europe, including majority control of Italy's No. 2 player, Omnitel Pronto Italia. The deals turned Mannesmann into a regional power. Only one trouble: Its stock price, sagging under the old-line steel business, trailed the high-flying industry. This led to takeover rumors, centered on Vodafone, Mannesmann's partner in Germany and Italy. By this autumn, Esser had to move quickly--to eat or be eaten. His competitors, their eyes on upcoming license sales for high-speed Third Generation networks, were busy staking their turf. Deutsche Telekom raided Britain's market with its buyout of One 2 One. France Telecom mobile was spending $9 billion for control of Germany's third mobile operator, E-Plus. And in the U.S., MCI WorldCom Inc. was paying a mind-boggling $129 billion for Sprint Corp. To strengthen his stock, Esser announced plans in September to separate the telecom business from heavy industry, giving it a stock of its own. At the same time, he cranked up talks with Li Ka-shing, Hong Kong-based chairman of Hutchinson Whampoa Ltd., which is Orange's largest shareholder, with a 45% stake. The deal pumps $14.6 billion into Li's pocket, including $8.8 billion in Mannesmann shares. Esser, meanwhile, is left wrestling with a pricey investment. By passing up One 2 One and waiting for Orange, Esser will spend an extra $17 billion for his foothold in Britain. While DT paid $4,000 per subscriber, Mannesmann may pay $7,000. Why so costly? ''There's not much left,'' says Christian Kern, European telecom analyst at Salomon Smith Barney. Still, the Orange purchase has its advantages. The company is a growth leader in Britain, with its customer base doubling, to 3 million, in the last year. Orange is also leading the race to the mobile Internet in Britain, with plans to sell videophone service by next year. And among a dreary collection of look-alike mobile brands in Europe, the Orange label shines brightly--its image burnished by irreverent ads. ''We wanted a brand name that was young, dynamic, and would cross international boundaries,'' says Orange CFO Graham E. Howe. Mannesmann could well export the Orange brand to its operations throughout Europe. Not surprisingly, the survival key for Mannesmann/Orange, as well as other players in Europe, will be to drive the stock price upward. High market caps will separate predators from prey. Winners are likely to develop positions in the mobile Internet, a market that's expected to reach 300 million consumers by 2003. Those that push their brands onto the welcome screens of data phones could be raking in ads and battling the likes of Yahoo! Inc. and America Online Inc. in the next generation of the Internet. What's more, they could command Internet-style stock valuations, powering them to commanding positions in the industry. For now, though, it's a land grab. And Mannesmann, even with Orange on board, is still not secure as a stand-alone player. Indeed, Esser is likely to hear from his longtime partner, Vodafone CEO Christopher C. Gent. The Orange deal brings Mannesmann into the battle in Vodafone's home market and complicates joint ventures in Germany and Italy. This could lead Vodafone to buy Mannesmann itself, perhaps spending $75 billion. ''If I were Vodafone,'' says Deutsche Telekom CEO Ron Sommer, ''I might go see Mr. Esser with a bunch of flowers and maybe a checkbook.'' The checkbook for sure. But in Europe's phone takeover wars, there's no time for flowers. By Stephen Baker in Paris, with Jack Ewing in Berlin, Heidi Dawley in London, and Mark Clifford in Hong Kong _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
|  |
 | |
RELATED ITEMS Euro Cell Phones: Mannesmann Calling (int'l edition) TABLE: The Contenders ONLINE ORIGINAL: How Li Ka-shing Made Big Green on Orange (int'l edition) INTERACT E-Mail to Business Week Online | |||
