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Vodafone AirTouch’s Bid for Mannesmann

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Vodafone AirTouch, one of the world’s leading international mobile telecommunications companies, was considering launching a formal hostile bid for Mannesmann, a German telecommunications company which is also among the largest telecommunications companies in Europe. If this come true, it will become the largest hostile takeover in the world. But now we are facing one of the biggest problems during this process—valuation of Mannesmann. After our discussion, we decide to use the DCF method with the information provided in Exhibit 7 and some reasonable assumptions we made about Mannesmann’s future situation. As a result, we found that the value of Mannesmann is € 175,793.41million or € 338.85/share which is lower than € 350/share.

At last, we also consider the synergy from the deal based on Goldman Sach’s estimation or market’s angle. Based on Goldman Sach’s estimation, we find that the synergy from the deal is about $7510.98 million. Thus, we would suggest Vodafone’s shareholders to accept the acquiring offer for Mannesmann. But with the consideration of the market estimated synergy analysis, the synergy value is €45911.84 million. Although the synergy value is positive, the NPV based on market estimation is negative, so we do not recommend Vodafone acquire Mannesmann.

Problem Overview
Vodafone AirTouch, one of the world’s leading international mobile telecommunications companies, was considering launching a formal hostile bid for Mannesmann, a German telecommunications company which is also among the largest telecommunications companies in Europe. If this come true, it will become the largest hostile takeover in the world. The combination of Vodafone AirTouch and Mannesmann will give rise to signify synergy. But there is also a big problem we need to handle which is related to the valuation of Mannesmann and the estimation of the synergy acquired after acquisition.

Analysis
1. Mannesmann’s Acquisition of Orange PLC – qualitative analysis It seems that Vodafone’s hostile bid for Mannesmann was triggered by Mannesmann’s sudden interest in acquiring Orange PLC, Vodafone’s rival in the UK market. However, it is reasonable for Mannesmann to set Orange as target from both strategic and economic perspectives. Strategically, Mannesmann pursued an integrated telecommunications strategy, aiming to be a single supplier of fixed lines, wireless, and internet activities to increase average revenue per user. Besides, control is emphasized to maximize the value inherent in a customer base. Orange meets these requirements with CAGR in number of subscribers of 115.5%, from 1994 to 1998.

Economically, the industry had grown rapidly and the fastest growth had been in the wireless or mobile segment, indicating the fact that Orange, as a third largest wireless operator in the UK with a market share of 18%, can help Mannesmann to gain size and global scale to attract the best global content providers on the best terms. The wireless markets in Europe and in the US are different. In keeping with its European focus, Mannesmann targeted at Orange is reasonable. Furthermore, at company level, Orange is the first to aggressively market mobile data service, prior to other big companies including Vodafone. 2. Mannesmann’s Acquisition of Orange PLC – quantitative analysis To determine whether Mannesmann overpaid for Orange or not, we choose One2One as the comparable company and EV/EBITDA as the comparable multiple. We suggest the fair value of Orange should be €22.11 billion based on the following approach: a) One2One Firm Value = Transaction value = €14 billion

b) One2One’s
c) Orange’s Firm Value
Using One2One as the comparable company is due to the similarity of the two companies in geometric market & market share (18% and 16.6% respectively), Equity POPS, and transaction date. EV/EBITDA is independent with capital structure; therefore we do not have to adjust our valuation to debt/equity ratios. Besides, the fact that Mannesmann’s share price dropped 8% within 4 days after the announcement of the Orange acquisition indicates the market believes €31 billion is not wise. Based on our analysis above, we conclude that Mannesmann overpaid Orange.

3. Vodafone’s Acquisition of Mannesmann
In order to measure whether or not we will accept the current offer as a shareholder in Mannesmann or Vodafone, we have to estimate Mannesmann’s equity value. Exhibit 7 in the cases provided us financial information about Mannesmann, which could be used to estimate future free cash flow. Then we could value Mannesmann with DCF method. First of all, we have to make enough reasonable assumptions about future situation. 1) From Goldman Sachs’ report in Exhibit 11, we could find estimated WACC is 7.6% and long-term growth rate is 4%. 2) EBITDA growth rate is assume to be almost constant for three year at 40% and then decrease with a decreasing speed. 3) Depreciation & Amortization is assumed to be 55% of EBITDA, an average figure of year 1996 to 1998. 4) Interest payment is assumed to increase at 1998’s level.

5) Capital expenditure & Changing Working Capital is calculated as Changing (Tangible assets + Intangible assets) – Changing (Trade creditors + Amounts owned to credit institutions). Second, we could calculate future free cash flows with all these assumptions. Then estimated value of Mannesmann could be derived by discounted all these cash flows, which ends up with € 175,793.41million or € 338.85/share. The current offer valued Mannesmann’s share price at €350 higher than our estimation by 3.3%. Though this premium is not a huge amount of money for one share, it is about €6 billion premium for equity value. And this estimated premium is calculated under an optimistic altitude to the future, thus we would recommend Mannesmann’s shareholders to accept this offer. On the contrary, without enough synergies, Vodafone’s shareholders should reject this offer.

Obviously, we have to consider the potential synergies after combination of the two in order to obtain a justifiable estimation of Mannesmann’s value. To analyze this question we used Goldman Sachs’ synergies estimation, which consists with two prospective: operating profit and saving capital expenditure. Consider the operating profit prospective, we use WACC to discount each after tax cash flow to get each PV since 2001 to 2006; furthermore because Goldman Sachs’ assume that the revenue and cost synergies would grow at 4% in perpetuity, terminal value after 2006 has to be considered into synergy value.

While on the other hand, for the saving in Capex prospective, we applied same discount method that is WACC to get each cash flow, Goldman Sachs’ also assume that capital expenditure synergies associated with 3G would not be perpetual but would end in 2006, that means, there is no terminal value after 2006 for savings in capital expenditures. In addition, the determined factor which whether Vodafone acquire Mannesmann is not only synergy, the PV of Mannesmann and the acquisition value affect the decision as well. According to above idea we applied, the following are the detail about how our approach works: Total synergies consist with three part, which are total PV of operating profit, total PV of Saving in Capex, and terminal Value of operating profit NPV = PV of Mannesmann without Orange + Total synergies – Bid Value From Exhibit 10, the NPV based on Goldman Sachs’ synergy estimation is positive which $7510.98 million is.

Thus, we would suggest Vodafone’s shareholders to accept the acquiring offer for Mannesmann. Market implied synergies could be used as supplement method of evaluating our estimation. In market estimated synergy prospective, we estimate expected synergy by using the market price of Mannesmann. Considering market estimation, there are two stock prices we focus which are the price of the day Mannesmann acquire Orange and the current price. In fact, the difference between these two prices is the expected synergy per share, because we assumed that no Orange acquisition synergy involved for both Goldman Sachs’ scenario and Market estimated synergy scenario.

On Oct. 21st, Mannesmann implemented deal, acquiring Orange; without synergy of Orange, we picked up this day to be the initial day to estimate expected synergy. In terms of above estimation, we did the following technics: Expected synergy per share = Current stock price – Price of the day Mannesmann acquiring Orange. Total synergy = Expected synergy per share * Mannesmann outstanding shares Therefore, we got implied market estimated synergy is $45911.84 million, which shows on Exhibit 10.

Conclusion and Concerns
With all the information and calculation above, we determined whether or not we will accept the current offer as a shareholder in Mannesmann or Vodafone, we have to estimate Mannesmann’s equity value. Then estimated value of Mannesmann could be € 175,793.41million or € 338.85/share. The current offer valued Mannesmann’s share price at €350 higher than our estimation by 3.3%.

Though this premium is not a huge amount of money for one share, it is about €6 billion premium for equity value. And this estimated premium is calculated under an optimistic altitude to the future, thus we would recommend Mannesmann’s shareholders to accept this offer. On the contrary, without enough synergies, Vodafone’s shareholders should reject this offer. Furthermore, for the synergy valuation, based on the Goldman Sachs’ estimation synergy, NPV is positive which equals to €7510.98 million, in other words, Vodafone can acquire Mannesmann so that to add positive value. With the consideration of the market estimated synergy analysis, the synergy value is €45911.84 million. Although the synergy value is positive, the NPV based on market estimation is negative, we do not recommend Vodafone acquire Mannesmann.

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