Vodafone-Mannesmann deal may trigger wave of Euro telco mergers

MUNICH — Europe's biggest telecommunications players are likely to come under increased pressure to become even larger in the wake of the merger announced late yesterday between Mannesmann AG and Vodafone AirTouch PLC, analysts said today.

But corporate users and consumers will likely have to wait for some time before seeing any benefits from the expected acquisition frenzy that is likely to ensue.

The merger, approved today by the Mannesmann supervisory board, is a record-breaking transaction that Mannesmann Chairman Klaus Esser yesterday placed at 190 billion euros ($188.23 billion) (see story).

Mannesmann shareholders have until Feb.17 to cash their shares, at a ratio of one share of Mannesmann for 58.96 shares of Vodafone stock.

The merged company will be the biggest player in the mobile communications industry with over 10% of the global market, according to Analysys, a London-based telecommunications consultancy.

"Vodafone-Mannesmann, as well as Vivendi, is the closest we are going to get to a global corporate service," said Bernt Ostergaard, a research director with Giga Group in Copenhagen.

Vodafone last week agreed to enter into an Internet alliance with French conglomerate Vivendi if the Mannesmann deal succeeded. The details of that partnership still need to be hammered out.

With a deal of this magnitude, analysts foresee further consolidation among other European players looking to compete. Dataquest Inc. expects no more than three large European carriers in Europe's seven largest markets over the next five years, said Dirk Bout, a London-based senior analyst at Dataquest, who covers the wireless industry.

"With this big, influential player, other companies will need to start building their presence," Bout said. These include Deutsche Telekom AG, France Telecom SA, British Telecom PLC and Telecom Italia SpA, he said.

A likely acquisition candidate is Orange PLC, the U.K. mobile carrier that Vodafone earlier said it would spin off if its merger with Mannesmann came to fruition.

Mannesmann was in the process of acquiring Orange. However, it is unlikely that the European Commission will approve the deal if both Orange — the third largest carrier in the U.K. with some 4.9 million users — and Vodafone, the top U.K. carrier with nearly 8 million subscribers, are part of the same company.

Analysts differ on how this megamerger, and others expected to follow, will affect users.

Analysys foresees lower prices in the mobile phone market due to the beefed-up buying power of Vodafone AirTouch.

"Over the next few years, billions of dollars will be invested by all operators in new third generation networks. In an industry that is becoming increasingly capital intensive, obtaining the best deal from suppliers will be crucial to delivering those lower prices," said Analysys principal consultant Mike Grant in a prepared statement today.

Giga's Ostergaard also sees positive affects for corporate customers looking for a company on a global scale that can deliver mobile communications without roaming fees.

However, not all observers are convinced that users will see benefits over the short term.

Vodafone customers will likely suffer a drop in both service and innovation as the two companies concentrate on integration over the coming months, said Lars Godell, a telecommunications analyst with Forrester Research Inc. in Amsterdam.

"We saw the same thing with MCI WorldCom," said Godall, referring to the 1998 merger between MCI and WorldCom. "The hand-over was really bad for customers," he said, adding that it took many months before customer records were sorted out.

Nor does the combined company go a long way toward providing global coverage in the fixed-line business, Giga's Ostergaard said.

The new Vodafone has agreed not to sell Mannesmann's interests in the fixed-line market — Mannesmann Arcor AG& Co., and Infostrada SpA, the Italian fixed-line carrier. Beyond that, however, it has little presence in the fixed-line telecommunications markets.

"Eventually Vodafone will offer fixed-line service," Ostergaard predicted.

That goes back to a more fundamental question now being posed over whether carriers see the future as belonging to the mobile phone as a platform for Internet access or whether that future rests more firmly on integrating fixed-line and mobile networks, analysts say.

"The $1 billion dollar question is, is wireless the way to go or is a fixed component important?," asked Dataquest's Bout.

He sees a mix of the two as inevitable.

"Wireless will take over a lot of Europe's voice traffic, but if big players like Vodafone want to address the corporate market, they need to have a larger capacity than wireless can offer. They will need a presence in the fixed market," Bout added.

In late afternoon trading on the London Stock Exchange, shares of Vodafone were trading at 349.25 pence (56 US cents), down 19.25 pence (3 cents) from their opening price today.

(Doug Gray in London contributed to this report.)

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