Vodafone's pounds 37bn AirTouch coup shows mobiles can rule the world

News Analysis: The new company will use its muscle to take advantage of the explosive growth in cellular phone use in developed countries

IF ANYONE needed a sign of the explosive growth potential of mobile telecommunications, they need look no further than the negotiations which led to Vodafone's pounds 37bn takeover of AirTouch.

The deal, which was finalised over the weekend and given a rapturous reception on the stock market yesterday, must be one of the first ever mega-mergers to be agreed without the bosses of both companies sitting down face to face to conduct the negotiations.

Fittingly Chris Gent, the Vodafone chief executive who will run the combined group, and his opposite number at AirTouch, Sam Ginn, agreed the final details of the takeover while talking on their mobile phones on Friday night.

If Mr Gent has his way, a lot more important discussions will be conducted over mobile phones in the future. He believes that one in two people in most developed countries will own a mobile phone by 2003, and that the majority of voice telephony will eventually find itself onto mobile phones.

"The need for unrestricted communications can only be fulfilled by mobile telephony," Mr Gent said yesterday, as he predicted that Vodafone AirTouch, as the combined group will be called, would see its earnings before tax, depreciation and amortisation rise by more than 20 per cent a year for the next five years. Shares in Vodafone leaped more than 14 per cent yesterday as the takeover received an enthusiastic welcome from investors.

"They're getting 50 per cent of the equity and buying a company which has more customers and more profit," said BT Alex.Brown analyst Andrew Beale.

The deal brings together the two largest mobile phone operators on the globe to create a powerhouse with 23 million subscribers, combined revenues of almost pounds 6bn and a market capitalisation of pounds 68bn, making it one of the 10 largest telecom companies in the world.

Last night rival operators, reflecting on the implications of the deal, were torn between welcoming the coming of age of mobile telephony and worrying about the creation of a powerful new competitor.

"The deal is massive and it is stunning that a company as young as Vodafone could do it," one rival executive said. "It reconfirms our faith in the mobile industry."

However, Vodafone AirTouch, as the combined company will be called, will be a formidable competitor. It will have unrivalled purchasing power with the manufacturers of network equipment and mobile handsets, while also being able to strike better deals with international telecoms operators to carry its network traffic.

By exploiting these factors, the two companies expect to deliver cost savings of pounds 200m a year by March 2002 - a figure most analysts believe is conservative. This will enable Vodafone to cut call prices, further strengthening its position as the leading mobile phone operator in the UK. "The cost of calls has been coming down and that process will continue going forward," Mr Gent said yesterday.

What's more, the merger faces relatively few competition hurdles. The only overlap between the two operators is in Germany, where Vodafone has already signalled its intention to sell its stake in the E-Plus network.

Vodafone was yesterday also playing down the prospect of a legal battle with Bell Atlantic, the US telecom group which pulled out of the bidding war for AirTouch on Friday. Bell and AirTouch have a joint venture in the US called PrimeCo, which allows the two companies to offer near-national coverage.

Bell is understood to be suing AirTouch for violating the non-compete agreements between the two companies. However, Mr Ginn suggested the dispute could be settled amicably. "It is in everybody's interest including Bell Atlantic's," he said.

Looking ahead, Vodafone AirTouch will be in a prime position to create what many international travellers have long craved - a seamless network that allows mobile phone users to use the same phone all around the world.

At the moment, the market is still divided between GSM, which is the dominant standard in Europe, and CDMA, which has been adopted in the US. As a result, almost no mobile phones work on both sides of the Atlantic.

However, with the introduction of the third generation of mobile-phone technology, a global standard is set to emerge. Licences for the new standard, which will be able to carry large volumes of data, will start to be awarded within the next year.

"One of the hidden areas of shareholder value creation will come from the combined group's broadband strategy when we see the start of UMTS," said Chris Godsmark, an analyst at Henderson Crosthwaite. "Vodafone AirTouch could be positioned to be one of the world's number one Internet carriers."

The Vodafone AirTouch merger also increases the probability that a single international standard will actually emerge. Until now European manufacturers, led by the Swedish firm Ericsson, have been engaged in a war of words with Qualcomm, an aggressive US group which claims to own the patents to the new technology.

The issue had been threatening to escalate into a full-scale trade dispute between Europe and the US. But Mr Ginn yesterday said Vodafone AirTouch would insist on a single standard.

"Chris and I will put as much pressure on the International Telecommunications Union and other forums as possible," he said. "Let's use this opportunity to harmonise the technology around the world."

So Vodafone AirTouch looks assured of a prosperous few years. But observers are already questioning whether a pure mobile operator can prosper in the long term as fixed telephony becomes cheaper.

"Fixed networks will always have a massive cost advantage over mobile," one industry executive said yesterday. "We are great believers that fixed and mobile will eventually converge."

Nevertheless, analysts point out that if this judgment eventually proves to be correct, Vodafone AirTouch is in a much stronger position to buy up fixed telecom operators.

"Two years ago people were suggesting there was no way Vodafone would remain independent," one expert said yesterday. "Now it's become the aggressive one."