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.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
University Edible Garden, Leeds – a sustainable garden in the centre of the university, passers-by can help themselves to the home-grown produce
news
Arts and Entertainment
There are no plans to replace R Kelly at the event
music
News
newsThis 8-year-old boy carried his disabled brother through a triathlon
Sport
The Manchester United team walk out ahead of the pre-season friendly between Manchester United and Inter Milan at FedExField
transfers
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
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

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Liquidity Reporting-Basel III-LCR-Bank-£400/day

£400 per day + competitive: Orgtel: Liquidity Reporting - Basel III - LCR - Ba...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz