Vodafone deal to wipe out three years' profits

VODAFONE IS set to plunge into the red for the next three years as a result of its pounds 37bn merger with its US rival, AirTouch, to form the world's largest mobile phone group.

The British group yesterday warned that the mega-deal, clinched at the weekend, would result in a pounds 30bn accounting charge that would wipe out the enlarged group's profits until 2002.

Chris Gent, Vodafone chief executive, said the deal - which creates the UK's third-largest publicly quoted company, with a pounds 68bn market value - would not qualify as a merger under international accounting rules because of a large cash payment to AirTouch shareholders. This meant that the UK group would have to pay pounds 2bn a year for the next 15 years for goodwill - the price it pays over AirTouch's book value.

Vodafone, which defeated the US giant Bell Atlantic, is to pay about $5.3bn in cash and $52bn in shares, and take on $2.89bn of debt, to win control of San Francisco-based AirTouch. Mr Gent, who will be chief executive of the new Vodafone AirTouch, dismissed fears that the three-years of losses would lead shareholders to reject the deal. "None of the Vodafone investors have held our stock for the dividend. They see us as a growth stock." He said investors would focus on the larger group's ability to use size and global reach to boost revenues and cut costs.

Under the terms of the agreement, AirTouch will have to pay Vodafone up to $1bn if the merger collapses, while the UK group will have to pay $225m if its shareholders do not approve the deal.

The combined group - to be owned by Vodafone and AirTouch shareholders in equal parts - would achieve yearly cost savings of pounds 200m by mid 2002, the company said. Most of the savings would come from enhanced buying power with handset makers and greater efficiencies in the development of new technologies. Job cuts among the 24,000 joint workforce would be "minimal", with no redundancies expected in the UK.

The company, to be chaired by AirTouch chairman Sam Ginn, will operate in 23 countries and have over 23 million mobile phone customers and combined revenues of pounds 6bn. Its strength will be in Europe, where it will cover 11 countries.

Mr Gent said that he wanted to acquire businesses in the important US market to create a nationwide mobile phone network. He said the group planned to retain AirTouch's US joint venture with Bell Atlantic, but needed "one or two assets" to rival coast-to-coast providers such as AT&T and Sprint.

Mr Gent was confident that Bell Atlantic's recent threat to sue AirTouch over its link with Vodafone would be resolved "amicably in the near future".

The companies' main overlap is in Germany, where they are members of rival consortia. However, Vodafone has said it would sell its stake in Germany's third-largest mobile carrier to join AirTouch in Mannesmann Mobilfunk, the country's largest mobile group.

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