Bloomberg News

Vodafone May Merge Greek Mobile-Phone Unit With Wind Hellas

August 30, 2011

(Updates with analyst quote in fourth paragraph.)

Aug. 30 (Bloomberg) -- Vodafone Group Plc has begun talks about a potential combination of its Greek unit with Wind Hellas Telecommunications SA to rival market leader Cosmote Mobile Telecommunications SA controlled by Deutsche Telekom AG.

“Discussions are at an early stage and there is no certainty as to whether an agreement will be reached,” Newbury, England-based Vodafone, the world’s largest mobile-phone operator said in an e-mail yesterday.

A merger of Vodafone Greece, the country’s second-largest mobile-phone operator and Wind Hellas, the third-biggest, would allow Vodafone Chief Executive Officer Vittorio Colao to cut costs after service revenue slumped 19 percent in the country in the year through March. An enlarged subscriber base would also help to compete with Cosmote, a unit of Hellenic Telecommunications Organization SA, the operator known as OTE. Deutsche Telekom in June raised its stake in OTE to 40 percent.

Vodafone would gain “substantial” cost savings from a merger that would also help OTE, said Robin Bienenstock, an analyst at Sanford C Bernstein in London. “While the market would become a duopoly, no one operator would possess an overwhelmingly large share,” she said.

The talks are focused on a complete merger of the units rather than a cooperation agreement, a person familiar with the negotiations said, declining to be identified because the discussions are confidential.

Cutting Costs

Colao in 2009 merged Vodafone’s Australian unit with Hutchison Telecommunications Ltd.’s operations as it sought to reduce expenses in a country with slim growth prospects. Vodafone wrote down the value of its Greek business in November by 800 million pounds ($1.31 billion), following higher discount rates. Vodafone Greece had almost 4 million clients as of June 30.

Vodafone dropped 0.5 percent to 161.10 pence as of 11:38 a.m. in London trading while the U.K. benchmark FTSE 100 index gained 2.3 percent. Deutsche Telekom dropped 1 percent in Frankfurt while OTE declined 1.6 percent in Athens.

OTE, which reported a total of 7.73 million wireless customers as of June 30, is in talks with workers to cut payroll and other expenses as a third year of recession in Greece crimped sales and profit at the Athens-based phone company. Bonn-based Deutsche Telekom has written down the value of its Greek investments.

A merger would also help the companies to pool resources in the fixed-line network market. Wind Hellas owns the Tellas broadband network while Vodafone has a minority stake in Hellas Online.

Shareholders

Greece sought and received a 110 billion-euro ($159 billion) bailout from its European Union partners in May 2010 as concerns the country would default on its debts spurred borrowing costs to a record. The government is implementing austerity measures in return for the loans and the wage and pension cuts and higher taxes have damped consumer spending.

Some analysts say that Greece’s economic woes make any deal risky for Vodafone.

“Even before the crisis it was questionable whether investing in Greece would be wise,” said Heinz Steffen, an analyst at Fairesearch GmbH in Kronberg, Germany. “With the current situation there I’m really not sure that getting deeper into the market makes sense.”

Bondholders

Wind Hellas is controlled by a group of bondholders who led a reorganization last year by injecting 420 million euros and writing off debt in exchange for control of the company. The group includes Mount Kellett Capital Partners (Ireland) Ltd., Taconic Capital Advisers UK LLP, Providence Equity Capital Markets LLC, Anchorage Capital Group LLC, Angelo Gordon & Co. and Eton Park International LLP.

The operator had 3.88 million wireless customers as of September 2010, according to the most recent quarterly report posted on the company’s website. Wind Hellas currently has about 4 million wireless and fixed customers combined, said a company spokesman who asked not to be named, citing company policy.

Former parent, Weather Finance III Sarl, the holding company of Egyptian billionaire Naguib Sawiris, had previously bought Wind Hellas out of bankruptcy.

Vodafone may acquire Wind Hellas for about 1 billion euros, Proto Thema reported yesterday, without saying where it got the information. In its statement, Vodafone said reports that it’s in talks to acquire Wind Hellas for cash are “incorrect.”

Wind Hellas confirmed that shareholders are in talks to explore a potential business combination. “At this point in time there is no guarantee these talks will conclude in an agreement,” Wind Hellas said.

‘Goodwill’

There is much “goodwill” between Colao and Wind Hellas CEO Nasos Zarkalis, said John Karidis, an analyst at MF Global in London. “We think Vodafone and Wind Hellas will merge.” Zarkalis is a former senior Vodafone executive.

Colao, a former McKinsey & Co. partner, is reviewing all minority interests and trying to eke out more profit from existing operations.

Under Colao, Vodafone has sold a minority stake in China Mobile Ltd. and reduced its interests in Japan’s Softbank Corp. It completed the sale of its 44 percent holding in French wireless operator SFR for 7.95 billion euros in June.

While selling minority assets, Colao is consolidating the company’s operations in existing markets. The company acquired an additional stake in its Indian venture after partner Essar Group exercised an option to sell down its holding. Last month, Vodafone said it would receive a 2.8 billion-pound from Verizon Wireless, the U.S. venture in which it owns a 45 percent stake.

--With assistance from Jonathan Browning in London and Ragnhild Kjetland in Frankfurt. Editors: Kenneth Wong, Simon Thiel.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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