Vodafone has the City hanging on the line

BUSINESS VIEW
After the comments of Mr Justice Lightman last week, one could be forgiven for dismissing anything said by a senior executive of Mannesmann out of hand. But Klaus Esser is right on the money with his assertion that Vodafone's bid for the German telecoms group he runs is a "speculative and risky" venture.

How risky is only just starting to become apparent, though one wonders what is the greater risk for Vodafone shareholders - to bid or not to bid?

There is an unanswerable strategic case for the Mannesmann bid. Vodafone desperately needs to secure a commanding position in European mobile telecommunications and rebalance the group, so that Vodafone actually controls the majority of its assets (something the market sees as a mere detail for one of the world's most highly rated companies).

However, the price being offered is quite frightening. Subscriber for subscriber, the bid values a German on the blower at between 50 per cent and a 100 per cent more than a Brit or a Yank on the blower, depending on how you do the sums. Clearly Chris Gent, Vodafone's chief, believes Germans either talk more or are willing to pay durch die Nase for their telecommunications.

Should the bid succeed - and I will stick my neck out here and predict it will - the group created will have a market value of around pounds 160bn. Given that current Vodafone subscribers pay around pounds 240 a year to the company and new subscribers pay just pounds 180, and allowing for the fact that subscribers will ultimately spend another pounds 50 a year sending email messages to each other, Vodafone will need to sign up a third of all the people over 12 in the US and Western Europe and make a margin of 30 per cent on its subscriptions to justify this value. A tough task, but one Mr Gent needs to achieve for the good of us all.

For if the all-share deal goes through, the Vodafone/Mannesmann/Orange combine will represent 11.8 per cent of the value of the FT-SE 100 index, overtaking the current largest, BP Amoco at 9.3 per cent. Of course Vodafone would have to get rid of Orange, but even if it refloats the other mobile operator (so enriching the merchant bankers of the City and the directors of Orange without delivering any apparent benefit to shareholders), the valuation would still be over a tenth of the index.

Taking into account all the large multinationals located in the UK, 10 companies will represent 65 per cent of the value of the UK market. This leaves the FT-SE 100 rather exposed to problems within one of these companies. And which is the company most likely to run into problems digesting a rather large acquisition? That's right, Vodafone.

The boys from Newbury may be able to bypass the Mannesmann board, and win the bid by going directly to the group's shareholders. But unless they can secure a recommendation from Mannesmann, and persuade Gerhard Schroder to soften his anti-British stance, Vodafone may find absorbing the German giant tricky.

Given the herd instinct of the stock market, news from Vodafone bad enough to trigger a fall from its lofty perch could bring the sort of correction the likes of Tony Dye have been predicting for some time.

Who'd have thought it?

I have received an exclusive leak of an announcement due to be released to the Stock Exchange next week, which I will print in full.

"The directors of Santa plc, a retailer which distributes gifts via the UK high Street sourced from a central operation in Lapland, have noted the estimates prevailing in the market from the well-informed and intelligent analysts employed by leading securities firms. In the opinion of the board, these are rather more optimistic than may be the case.

"Santa plc notes that trading will be impacted on by two rather unexpected events - Christmas and the millennium. Trading in the pre-Christmas period has been rather slow so far, with customers waiting to see when the retailers lose their nerve and start their January sales on or about 13 December.

"This pattern was entirely impossible to predict even though it is what happened last Christmas and the Christmas before (please don't dig up our old January trading statements, because we were rather hoping you had forgotten them).

"As for the millennium, we had stocked up in the expectation that everyone would buy new clothes to go out to glamorous parties, so boosting our clothing sales. It now appears that the majority of our customers will follow the pattern of previous years - in other words, slumping in front of the TV, drunk as lords, complaining about how boring New Year is.

"Accordingly, profits will be rather less than had been predicted at the time of our rights issue to buy the Reindeer chain.

"We trust you will understand, and refrain from selling our shares and calling for any resignations."

n j.nisse@independent.co.uk

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