Vodafone AirTouch's Bid for Mannesmann

Harvard Business School Case 201-096

Case Software 202-735

Copyright 2001 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.

Revised July 17, 2001

Revised April 29, 2002
Exhibit 3 Wireless Players in the UK Market, September 1999

Vodafone Cellnet Orange One2One

Market Share based on number of subscribers 35% 30.40% 18% 16.60%
1999E UK Revenues (billion ) 3 2.4 1.4 1.14
1999E EBITDA Margin 34.0% 12.8% 18.0% 14.0%
1999E EBIT Margin -- 2.7% 8.0% 5.0%
EV/EBITDAa 30 23 77.5 57
European Average EV/EBITDAb 21.9
European Median EV/EBITDA 21

a
EV was the enterprise value i.e., market value of equity and debt. The EV/EBITDA multiples for Orange and One2One
use the acquired price to estimate the enterprise value. EV/EBITDA multiples for Vodafone and Cellnet were based on analyst estimates of enterprise value.
b
The European average includes valuations of fixed line operators, which were lower than wireless operators.

Exhibit 4 Summary of Vodafone AirTouch Holdings Around the World, September 1999

Company No. of Countries No, of Controlled Enterprise Controlled

Companies Subscribers Subscribers
Europe 14 7 43,158 12,694
United States 1 0 25,000 -
Asia 6 2 12,110 1,593
Africa and Middle East 3 1 2,686 244

Exhibit 5 Selected Items from Consolidated Financial Statements for Vodafone AirTouch ( million)

6 months ending Year Ended 31 March

September 1999a 1999 1998 1997
Turnover (Revenues) 4,208 3,360 2,470.80 1,749
Total Group Operating Profit 253b 962.6 686.4 538.9
Net Profits (loss) (455) 636.7 418.8 363.8
Total Fixed Assetsc 48,483 2,852.1 1,911.5 1,926.6
Total Current Assets 2,247 791.5 590.8 495.2
Liabilities due within one year 7,700 1,529.9 1,426.4 1,013.2
Liabilities due after one year 2,036 1,189.4 696.4 580
Capital and Reservesd 40,994 924.3 379.5 828.6

a
Pro forma profit and loss under the assumption that Vodafone AirTouch merger took place on April 1, 1999.
b
Total operating profit before goodwill was 1.4 billion. Amortization of goodwill was 1.2 billion.
c
The goodwill arising from the merger of Vodafone with AirTouch was estimated to be 40.9 billion.
d
Total equity shareholders funds increased on account of the issue of new share capital of 39 billion in relation to Vodafones
merger with AirTouch.
Exhibit 6 Mannesmann and Its Businesses

Country Stake Sales 1998

Products (em)
Engineering
Rexroth Germany 100 Motion Control Equipment 2,547
Dematic Germany 100 Cranes & Handling Equipment 1,989
Demag KraussMalfee Germany 100 Plastic Machinery and Compress 2,132
Automotive
VDO Germany 100 Engineering Auto Manufacturers 3,338
Sachs Germany 100 Powertrain & Chasis 2,150
Tubes Germany 100 Seamless Welded Steel Tubes 2,338
Wireline Telecommunications
Arcor Germany 70.1 939
Infostrada Italy 100 188
Cegetel France 15 156
tele-ring Austria 53.8
Wireless Telecommunications
Mobilfunk (D2) Germany 65.2 3,731
Omnitel Italy 55.2 2,332
SFR France 12 2,658
Orange a
UK 100 1,731

Consolidated results for Orange PLC, acquired by Mannesmann in October, 1999.

a

Exhibit 7 Selected Items from Consolidated Financial Statements for Mannesmann (emillions)

Year Ended December 31,

1998 1997 1996
Total Sales 19,065 19,989 18,115
EBITDA 3,125 2,204 1,992
EBIT 1,469 894 954
Net Profit (loss) 239 189 584
Intangible assets 2,816 2,003 997
Tangible assets 4,902 4,689 3,809
Trade creditors 1,452 1,696 1,428
Amounts owned to credit i 1,803 1,361 617
Other Liabilitiesa 7,734 7,514 6,314
Shareholders Equity 6,360 4,498 3,942

Includes provisions for pension liabilities and other liabilities.

a
Exhibit 8 European and US Mobile Transactions in 1999

Stake Equity POPSa Equity

Date Name Acquired (%) (m) Subscribers (m) EV/Subc(e) EV/POPc (e)
European Mobile Transactions (Acquirer-Target)
Jun Bouygues - Bouyges Tel 20 11.6 1.9 932 153
Jul BT-BT Cellnet 40 4.6 2.08 2,813 1,272
Aug Deutsche Telekom One2One 100 58.1 2.98 4,745 243
Oct France Tel E Plus 17.3 14.1 0.51 5,157 187
Oct France Tel E Plus 60.1 49.3 1.77 5,989 215
Oct Tele Danmark Netcom 19.6 0.8 0.15 2,800 525
Oct Mannesmann Orange 100 58.1 3.5 8,857 533
Jan Oliman-BAM 10.3 13.5 0.67 3,134 156
Mar Mannesmann Omnitel 23.5 13.5 1.6 3,538 419
Mean 4,354 443
Mean for controlling dealsb 6,530 330
US Mobile Transactions (Acquirer-Target)
Jun Vodafone AirTouch 100 211.8 14.2 5,620 377
Mar AT&T Vanguard 100 9.7 0.7 2,629 190
Mar SBC Comcast 100 8.6 0.75 2,413 210
Apr GTE Ameritech 100 11 1.7 2,018 312
Jun Hutchison Voicestream 30 17.6 0.55 2,236 70
Jun Voicestream Omnipoint 100 26.4 0.59 2,085 47
Jul Vodafone Comnet 100 7.6 0.34 4,206 188
Sep Voicestream Aerial 100 25.4 0.35 5,480 76
Oct Worldcom Sprint 100 220 4.0 12,100 220
Mean 4,310 188
Mean for controlling dealsb 4,569 203

a
Equity POPS is a pro-rata value, which reflects the firms share of the population served by the target firm, based on the equity stake acquired.
b
Controlling deals were deals in which a majority stake was acquired.
c
EV/Subscriber multiple was obtained by dividing enterprise value by the equity subscribers while EV/POP multiple was the enterprise value
divided by equity POPS of the firm.
Exhibit 10 Estimation of Synergies from Vodafone AirTouch's Acquisitions of Mannesmann ( m)

Synergy as % of
Year End March combined firm in
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2004c
Revenue Synergy 0 50 153 469 656 977 1,221 1.70%
Cost Associated with Revenue Synergy 0 (40) (107) (281) (328) (488) (610)

Cost Synergy 0 80 200 500 656 732 879

Total Operating Profit Impact 0 90 246 688 984 1,221 1,489 5.70%
Savings in Capital Expenditures 0 60 147 360 420 469 506 7.80%

Assumptions
WACCa 7.60%
Perpetuity Growthb 4%
Tax Rate 35%

a
The WACC assumed a Nominal Sterling () risk free rate of 5.5%, a market risk premium of 2%, cost of debt of 7%, gearing ( the ratio
of debt to total market value of the firm) at 5%,and corresponding equity beta of Vodafone of 1.1.
b
The estimated inflation in the UK was 2.5%.
c
The expected synergies in 2004 as a percentage of the respective categories i.e., revenues, operating profits and capital expenditures
for the combined firm in 2004.
Exhibit 11a Value of Vodafone AirTouch and Mannesmann ( m)

Year ending March 2000E 2001E 2002E 2003E 2004E 2005E

Vodafone AirTouch
Proportionate EBITDAa 3,925 5,191 6,747 8,497 10,653 13,044
Taxes Paidb 861 1,188 1,594 2,042 2,559 3,138
Capital Expenditure c
3,505 3,945 4,169 4,265 4,324 4,534
Free Cash Flows (441) 58 984 2,189 3,770 5,372
Terminal Value 155,200
Enterprise Value 116,361

Mannesmanns Telecommunications Business (not including Orange)

Proportionate
Telecommunications EBITDAa 1,565 2,101 2,923 3,908 4,822 5,905
Taxes Paid b
343 481 690 939 1,158 1,420
Capital Expendituresc 1,125 1,145 1,192 1,324 1,342 1,256
Free Cash Flows 96 474 1,041 1,645 2,322 3,228

Terminal Value 93,261

Value of Telecommunications 71,387
Business

Assumptions
1. WACC = 7.6%
2. Terminal Value Growth Rate = 4%

a
Proportionate EBITDA is a pro-rata consolidation which reflects the firms share of EBITDA in both its consolidated
and unconsolidated entities. Proportionate EBTIDA is not a recognized presentation under either UK or German GAAP.
The EBITDA for Mannesmanns telecommunications business does not include Orange PLC.
b
The taxes paid were estimated after deducting depreciation but before any interest payments
c
The estimated depreciation was assumed to be approximately equal to capital expenditure in 2005.
Exhibit 11b Equity Valuation of Vodafone and Mannesmann ( m)

Vodafone AirTouch Mannesmann

Value of Telecommunications Business 116,361 71,387
Value of Orange PLCa 17,730
Value of Industrialsb 7,405
Total Enterprise Value (EV) 116,361 96,522
Value of Proportionate Net Debt 8,000 16,250
Value of Equity () 108,361 80,272
Value of Equity (e)c 173,377 128,434

a
The value of Orange was based on an EBITDA estimate of 598 for 2000 and Vodafones EV/EBITDA multiple of 29.6.
b
The value of Mannesmanns non-telecommunications industrial assets was based on the EBITDA estimate of 903 for 2000 and a EV/EBITDA multiple of 8.2.
c
The value was converted to e at the spot exchange rate on December 17, 1999 of e1.6 = 1.
Exhibit 12 Equity Valuations of Mannesmann and Vodafone AirTouch (Billions )

Vodafone
Date Analyst Mannesmann AirTouch Valuation Methodology
Nov-99 Credit Suisse First Boston 90 143 Sum of Parts, DCF, EV/EBITA
Dec-99 Dresdner Kleinwort Benson 131 178 Sum of Parts, DCF, EV/EBITDA
Dec-99 Exhibit 11 128 173 DCF on Proportionate Cash Flows
Dec-99 Julius Br 129-181 Sum of Parts, DCF, M&A premium
and Conglomerate Discount
Nov-99 Commerzbank 122 Sum of Parts, DCF, EV/EBITDA

18-Nov Market Prices 108 138

17-Dec Market Prices 121 154

Note: Equity valuations are under the assumption of full acceptance of Mannesmanns offer for Orange.
Mannesmann had 517.9 million and Vodafone AirTouch had 31,105 million shares outstanding. Sum of Parts methodology
valued each affiliate using DCF or multiples and added proportionate values based on equity stake to obtain the value of the group.
DCF on proportionate cash flows first estimated proportionate cash flows of the group (based on equity stakes held in affiliates),
which were then discounted.
are Prices and Exchange Rates (October-December 1999)

Date Mannesmann Vodafone Value of 1e Date

10/19/1999 153 2.74 0.6467 Press reports Mannesmanns interest in Orange PLC 11/23/1999
10/20/1999 158.6 2.57 0.6465 Mannesmann makes deal with Orange 11/24/1999
10/21/1999 145.35 2.7 0.645 11/25/1999
10/22/1999 141.3 2.69 0.6428 11/26/1999
10/25/1999 143 2.64 0.6422 11/29/1999
10/26/1999 147.5 2.73 0.6402 11/30/1999
10/27/1999 145.5 2.72 0.6392 12/1/1999
10/28/1999 148.5 2.69 0.6413 12/2/1999
10/29/1999 149.5 2.83 0.6406 12/3/1999
11/1/1999 146.5 3 0.639 12/6/1999
11/2/1999 144.75 2.89 0.6372 12/7/1999
11/3/1999 146 2.95 0.6374 12/8/1999
11/4/1999 147.9 3.01 0.6373 12/9/1999
11/5/1999 159.95 3.17 0.6412 12/10/1999
11/8/1999 165.25 3.18 0.6413 12/13/1999
11/9/1999 162.6 3.22 0.6415 12/14/1999
11/10/1999 175.2 3.2 0.6419 12/15/1999
11/11/1999 178.9 3.17 0.6413 12/16/1999
11/12/1999 185 2.96 0.6394 Vodafones first bid for Mannesmann 12/17/1999
11/15/1999 201.5 2.92 0.6362
11/16/1999 206.2 2.71 0.6371
11/17/1999 195.8 2.77 0.6396
11/18/1999 208.7 2.83 0.6381
11/19/1999 194 2.75 0.6365 Vodafones amended offer for Mannesmann
11/22/1999 186.5 2.75 0.6371 Mannesmanns offer for Orange PLC becomes unconditional
Mannesmann Vodafone Value of 1e

181.5 2.73 0.6329

187.5 2.79 0.6322
202.8 3 0.6313
202 2.98 0.6301
204.95 2.95 0.6287
206.4 2.95 0.6322
215.7 3.02 0.631
220.6 3 0.6276
226 3.05 0.6253
234.5 3.18 0.6321
238.6 3.26 0.6298
231 3.12 0.6303
234.5 3.14 0.6268
229.8 3.11 0.6264
224 3.04 0.6231
229 3.08 0.6226
221 2.99 0.6241
227 3.06 0.6313
234 3.11 0.6274