Corporate Profile: Mannesmann - Ring of confidence

Mannesmann is on the march. A decade ago, as it churned out steel pipes and compressors, few people outside Dusseldorf had heard of the firm. Today, after startlingly aggressive expansion, it is a European telecoms leader. But can Klaus Esser, its new chief executive, really afford pounds 10bn to buy the loss-making One2One?

FOR KLAUS ESSER, the new head of Mannesmann, last week's trip to London was a step into unfamiliar territory. Executives from the German steel tubing and hydraulic lift manufacturer, which over the past decade has re-invented itself as one of Europe's most active telecommunications players, do not normally rub shoulders with international lenders. But there was Mr Esser making a personal pitch to a London convention full of them, telling his audience that his company had never before fielded a speaker at an event with the word "borrower" in the title.

It is a big shift for this firm, which built its somewhat staid reputation on such nuts and bolts businesses as steel pipes, gears and compressor machinery. Given the cyclical nature of engineering businesses, explained Mr Esser, "the idea was we better stay away from debt". But that was before Mannesmann's recent buying spree, spending 11bn euros (pounds 7.2bn) so far this year on telecoms assets, and pushing gearing levels at the 109-year- old company from virtually zero to 160 per cent. "Our portfolio is now growing and we need the breadth of all financing, both equity and debt, because the opportunities and the size of deals are different from our cyclical businesses," he added, with some understatement.

Last month, Dusseldorf-based Mannesmann bought Olivetti's Italian phone operations for 7.6bn euros (pounds 4.9bn), part of the fall-out from Olivetti's successful takeover battle for Telecom Italia. That left the German company ranking as the second biggest carrier in two of Europe's four biggest economies, Germany and Italy. Today, including its partnership in a French and an Austrian operator, Mannesmann can compete in about 50 per cent of the western European telecommunications market.

But Mr Esser is not going to stop there, given Mannesmann's aim of becoming the main competitor to Europe's former state-owned telecom monopolies. He now has his sights on other European markets, including the UK, where the German firm has thrown its hat in the ring for the country's smallest mobile phone operator One2One, which has been put up for sale by its owners Cable & Wireless and MediaOne. Although One2One has never made a profit, it could fetch more than pounds 10bn. Whether Mr Esser's new embrace of debt financing might extend that far is open to question. When asked, he admits that the UK, as one of Western Europe's biggest economies, is a key strategic market, but he cautions that he has a record of being "a little choosy in the prices we pay".

What is not in doubt is 51-year-old Mr Esser's central role in Mannesmann's transformation. Formerly finance director, he was confirmed as the chief executive at last month's annual shareholders' meeting. He takes on the job at a time when Mannesmann's share price is on a roll, up 100 per cent in 1998 and another 40 per cent so far this year.

It was not ever thus. Founded in 1890, Mannesmann was for decades a typical German heavy industrial combine, long on manufacturing expertise, but hardly renowned as a regional growth stock. In the 1970s and 1980s it broadened its engineering interests and moved into auto parts, but it was not until 1989 that its sights turned to telecommunications. First the company concentrated on the German mobile phone market winning, in partnership with AirTouch of the US, the licence to operate a cellular network in competition with Deutsche Telekom, the former state monopoly. The venture proved so successful - in 1994 Mannesmann's D2 mobile network became the biggest operator in Germany - that Mannesmann linked with the German railway, AT&T, and Deutsche Bank to launch Mannesmann Arcor, now Germany's number two fixed-line operator. Geographical expansion proceeded apace; in France, it has a minority stake in the second largest telecoms operator with French water-to-media conglomerate Vivendi.

Telecoms now drive Mannesmann's earnings, contributing only a quarter of the company's total sales but close to 90 per cent of its operating profits. Mannesmann is spending more than half its annual investment outlay on telecoms. As Mr Esser says, with further Germanic understatement: "It is evident that telecoms and tubes are very different businesses."

Mr Esser's challenge is to make sense of such a diverse corporate portfolio, which spans all the old engineering businesses while also being at the forefront of the telecommunications revolution in Europe. There have been calls from some analysts to split the engineering and steel businesses from the faster-growing telecoms ones. The company says it has no plans to go that far, but a paring down process of underperforming assets is underway.

The new chief executive is well-qualified for the task. As finance officer, much of his efforts were devoted to improving the bottom line of the core manufacturing divisions. He has set a yardstick for all the old-line businesses to return 20 per cent on operating assets. The result has been a shedding of some 40 businesses in the past few years. Thus far it has retained the steel tubes business, a major employer in Dusseldorf, but one which Esser admits has "no chance" of making the 20 per cent return threshold. Mr Esser says there are some "intelligent solutions" in the works to dispose of the business, which might include a deal with Thyssen, a German steel giant that has also been diversifying into telecoms. "It's a little bit of the General Motors problem in Michigan," noted one securities analyst. "It has big political ramifications whatever they do."

As the competition for high-growth telecoms businesses heats up, Mannesmann will need to be increasingly flexible over both the prices it is willing to pay for licences or equity stakes, and the partnerships the company is willing to make. If One2One is too expensive, for instance, analysts suspect there may be another option. Hutchison Whampoa could be looking to restructure its stake in One2One's bigger rival Orange.

Other European markets targeted for expansion include Spain and Switzerland, both for fixed line and mobile telecommunications, says Mr Esser. And despite recently failing to win an auction for a Hungarian mobile phone licence, he says he will continue to look for opportunities in Eastern Europe. He is also interested in bidding for the next generation of mobile licences when they start coming to auction next year. Those licences, which allow multi-media-type applications on mobile phones, could provide the first cross-over between the two sides of Mannesmann. Its automotive unit designs in-car navigation equipment that could be linked to receive information from mobile telecoms networks.

But just spending money may not be enough to keep Mannesmann in the European "alternative" telecoms premier league. Olivetti's success in securing Telecom Italia stunned the industry and gave Mannesmann the opportunity to become the key alternative telecoms player in Italy as well as figuratively thumb its nose at its rival Deutsche Telekom, which saw its own merger plans with Telecom Italia dashed. But Olivetti's triumph also proved that no company is invulnerable.

Telecoms giants are positioning themselves for the 21st century. Earlier this year, for instance, the UK operator Vodafone agreed to a $63bn (pounds 40bn) merger with AirTouch that will give the new telecoms titan a global footprint. Yet even with its size, together Vodafone and AirTouch will be the majority stakeholders in the leading alternative telecoms carriers in only one European country - the UK. In Italy and Germany, Vodafone/AirTouch are partners in alternative telecoms with Mannesmann, while in France both Mannesmann and Vodafone/AirTouch are minority partners with Vivendi in the leading alternative telecom firm Cegetel/SFR.

These cross-shareholdings among Mannesmann, Vodafone/AirTouch and Vivendi seem to beg for some kind of sorting out, say analysts, and it is only a question of who will lead it. Mannesmann's problem, says one industry watcher, is that the group is still an engineering-minded company. According to this view, Mannesmann was lucky in both Germany and Italy to have partners like AirTouch. There is one story, unconfirmed by Mannesmann, that several years ago the German company wanted to repatriate cash out of Italian mobile operator Omnitel rather than keep investing to spur growth, until partners Vodafone and Bell Atlantic convinced it otherwise.

Closer to home, last year Mannesmann was slow to introduce call-by-call charging in Germany. This meant that while Deutsche Telekom lost about 25 per cent market share last year, Mannesmann only picked up seven per cent, half as much as rival operator Mobilcom, which introduced the new charging scheme quicker.

Mr Esser says that he plans to keep Mannesmann as an independent company, and keeping all of Mannesmann's businesses together would certainly make a hostile takeover more complicated. This kind of defensive approach would explain why Mannesmann is among the list of potential buyers for Dutch telecoms company KPN.

In the fast-moving telecoms game, consolidation is one survival option. Mr. Esser admits that the stakes are high and the competition fierce but he is not about to fold his hand. "It is a competition. That is clear," he says. "You put your cards on the table and you see who is better."

Main Mann

Market capitalisation: 59bn euros (pounds 38.3bn)

Turnover in 1998: 19bn euros (pounds 12.2bn)

Net profits: 630m euros (pounds 410m)

Main Markets: The engineering, automotive and tubes divisions are the traditional group businesses, but it is building the telecommunications arm which has dominated the past decade. Group networks now cover more than 50 per cent of the Western European telecoms market.

In its home country, Germany, Mannesmann owns 65 per cent of the D2 mobile network and 70 per cent of Mannesmann Arcor, a fixed-line network. In April, it purchased the o.tel.o, a fixed-line network for big corporate customers.

In Italy, Mannesmann owns 55 per cent of the mobile operator Omnitel, and all of the fixed-line operator, Infostrada.

Its French presence is through SFR (mobile) and Cegetel (fixed line), while in Austria it has a majority stake in the fixed-line tele.ring.

Key executives: Klaus Esser, chief executive (above); Harald Stober, chief executive of Mannesmann Arcor (below).

Employees: 118,300 (one-third outside Germany).

How A Family Steel Firm Became A Telecoms Giant

1890: The company was founded, based on the breakthrough invention by the brothers Reinhard and Max Mannesmann of a process for making seamless steel tubes by rolling a solid ingot.

1929: The steel works in Duisburg-Huckingen start production. After the Second World War, "Mannesmannrohren-Werke" are liquidated at the instance of the Allies and divided into three independent companies in 1952, only to be re-merged three years later.

1970s: Mannesmann becomes the biggest producer of tubes and pipes in the world. But fundamental changes and reorganisation get under way to gear the group towards new fields of business such as auto parts.

1990: The group breaks into the telecoms market as the majority shareholder in the licence for the first private mobile communications network in Germany, D2. Just four years later it becomes the mobile market leader.

1996: With German railways the company launches the fixed-line network Mannesmann Arcor, and subsequently expands into telecoms in France, Italy and Austria.

1999: Buys Olivetti's Italian telecoms interests, giving it control of two of Europe's three largest mobile networks.

Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth GamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Sport
Karen Dunbar performs
Entertainers showcase local wit, talent and irrepressible spirit
Sport
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
PROMOTED VIDEO
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Life and Style
fashion Designs are part of feminist art project by a British student
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
News
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
books
News
i100
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game