Mannesmann Vodaphone

FINA 7397 – Mergers & Acquisition

August 14, 2010

1. What was the strategic and economic rationale for Mannesmann’s acquisition of Orange? Did Mannesmann overpay for Orange? (Detailed analysis of why or why not)

Looking at Mannesmann’s acquisition of Orange and the timing of it, it is clear that Mannesmann hopes that the acquisition would block a takeover by Vodafone. Mannesmann is losing the industry consolidation race and is about to be gobbled up. Additionally, Orange is a great strategic fit for Mannesmann giving them market share and great growth in the UK market.

With a combined Mannesmann-Orange, Vodafone will likely not get anti-trust approval from the UK government to merge. This is primarily because Vodafone already has a 35% UK market share. By adding Orange’s share to that, Vodafone would have 53% market share. Also, Orange’s majority shareholder, Hutchison Whampoa, will receive shares that are locked up for 18 months – so they cannot sell their shares to Vodafone.

Orange PLC will provide a controlling interest in 18% market share of the UK market, expanding Mannesmann’s geographic footprint to the UK. Orange is a gem because it is still independent, and has additional holdings in Austria, Belgium, and Switzerland which all overlapped with Mannesmann. Orange is also a mobile telecom with a high growth rate; CAGR of 115%. From a strategic perspective, it makes a lot of sense for them.

From an economic rationale, Mannesmann paid too much. Looking at comparables, Deutsche Telekom paid 57 times EBITDA (Exhibit 3) for One2One early in the year. Mannesmann has paid 77.5 times EBITDA. The European average EV/EBITDA was 21.9 times EBITDA. Looking from a different perspective, Deutsche Telekom paid 4,745 Euros per subscriber while Mannesmann paid 8,857 Euros per subscriber. There could be other potential mitigating factors, such as growth and/or synergies, but it’s a stretch to justify the price they paid.

2. As someone...