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8/4/2019 Vodafone Mannesmann Final
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Vodafone-Mannesmann Case
Advance Corporate FinanceThursday, March 4th 2010
Pieters, Christine, 5656559Priyautama, Yoga, 5923646
Tan, Jason, 0577561
Terstappen, Jon, 5786169
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1 On November 19, 1999, Vodafone proposed that each Mannesmann share would
receive 53.7 Vodafone shares. In effect this means that in aggregate Mannesmann
shareholders would own 47.2% of the equity of the newly combined firm.1
On December 17, 1999, based on the stock prices of the two firms, the market
estimated the probability of Vodafone successfully acquiring Mannesmann at around 60%.Under the assumption that both firms would trade at prices prevailing at October 21 st if the bid
failed, what is the markets estimate of the synergies of the deal? Based on this estimate,
should Vodafone shareholders support the deal?
First, the stock prices of Mannesmann in euro, on the 21st of October and on the 17th of
December, are needed. The numbers can be found in the following table.
Vodafone wants a horizontal (strategic) acquisition of Mannesmann. To calculate the
markets estimate of the possible synergies of the deal, we view the relation of current stock
price, operating value and expected takeover premium (ETP). Therefore we assume riskneutrality, zero discount rate and therefore use the formula:
Expected takeover premium:
Current share price = Share price at October 21st+ (takeover probability * ETP)
With the previous numbers we can calculate the ETP:
234 = 145.35 + (0.6 * ETP) =
ETP = 147.75 Thus the ETP per share is 147.75.
Mannesmann has 517.9 million shares outstanding so the total ETP is 147.75 * 517,900,000
= 76.500.000.000. This is the markets estimate of the synergies of the deal.To answer the second question, whether Vodafone shareholders should support the
deal, we view the ETP and the stand-alone value of Mannesmann. Shareholders should
support the deal if the bid price is lower than the stand-alone value plus expected synergies.
bid price = 53.7 * 4.96 = 266.35 per share
(the take-over value of one share of Mannesmann is 266.35)
Share price at October 21st + synergies (Expected takeover premium per share) > Takeover
Value of Mannesmann
145.35 +147.75 (= 293.1 per share) > 266.35
1
Stock price in
(exchange rates
GBP/EUR) Vodafone Mannesmann
October 21st 4.19
(0.645)
145.35
December 17th 4.96
(0.6274)
234
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Therefore, shareholders should support the bid.
What is the present value of the expected synergies as shown in Exhibit
10? (Assume that the synergies related to revenues and costs grow at 4%
annually past 2006, but savings from capital expenditures would notextend beyond 2006, and that the merger will not affect the firms level of
working capital.) Use the average exchange rate of EUR/GBP=1.5789,
and the Goldman Sachs WACC estimate (notice that total operating profit
impact is pre-tax). Based on these calculations, should Vodafone
shareholders support the deal?
(EUR/GBP = 1.5789, WACC = 7.6%, Perpetuity growth = 4%, Tax rate = 35%)
Synergies (million EUR) 2000 2001 2002 2003 2004 2005 2006
Total operating profit 0 142.1 388.4 1086.3 1554.6 1927.8 2351
Capital Savings 0 94.7 232.1 568.4 663.1 740.5 798.9
Calculating cash flows from synergies we use:
CFT = (1 - T) EBITT + DEPRT NWCT - CAPEXT
Given our data and assumptions (bold in question) reforming the formula to:
CFT = (1 - T) Operating profit + CAPSAVINGST
(million EUR) 2000 2001 2002 2003 2004 2005 2006
Unlevered after-tax
CF from Synergies 0 187.1 484.6 1274.5 1673.6 1993.6 2327.1
Reforming;
PV Synergies = T=0, N=7 CFT / WACCTInto:
PV Synergies = T=0, N=6 [CFT / WACCT] + [(V7 / WACC7)]
Assuming that the growth rate already applies from the data in the table above. Taking
into account that the growth rate needs to be applied in perpetuity value of the operating
synergies after 2006.
Perpetuity value beyond 2006 = 2351(0.65) + ((2351(0.65)* 1.046) / 0.076 0.04)
= 2351(0.65) + 53711V7 = 55239.2 million EUR
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Plugging data into the formula:
PV Synergies = T=0, N=6 [CFT / WACCT] + [(V7 / WACC7)]
= 37504.5 million EUR
= 72.4 per Mannesmann share
Should Vodafone shareholders support the deal?Vodafone shareholders should support the deal if deal PV value is positive.
Deal NPV = PV Mannesmann + PV synergies bid price
We assume that (from exhibit11a) the present value of Mannesmann (without orange):
PV Mannesmann = 71387 mGBP
= 112700 mEUR
Deal NPV = 112000 + 37504.5 (266 * 517.9) = 11743.1 mEUR
Based on these calculations, Vodafone shareholders should accept the deal.
UK equities returned 7.7% over the UK risk-free rate for the period 1919-93. This suggests
that Goldman Sachs WACC estimate might be too low. Assuming a market risk premium of
7.7%, leverage of 5%, risk-free rate of 5.5%, and cost of debt of 7% derive a new estimate for
the WACC and redo part (b). Based on these calculations, should Vodafone shareholders
support the deal? Who is benefiting more from the deal, a Vodafone or a Mannesmann
shareholder?
To calculate the new WACC we use assumptions given (bold above) and the following
Formula:
WACC adjusted = (D/D+E) (1-T) rd + (E/D+E) re
Re = rf + (rm rf ) ; = 1.1 (from case data)
Re = 5.5 + 1.1 (7.7) = 13.97
WACC adjusted = 0.05 (0.65) (7) + 0.95 (13.97) = 13.5
To redo b) with the adjusted WACC we use the same described methodology.
Continue calculating:
Perpetuity value beyond 2006 = 2351(0.65) + ((2351(0.65)* 1.046) / 0.0135 0.04)
= 2351(0.65) + 14322.9
V7 = 15851.1 mEUR
Plugging new data into formula:
PV Synergies = T=0, N=6 [CFT / WACCT] + [(V7 + CAP7) / WACC7)]
= 9598.4 million EUR
= 18.5 EUR per Mannesmann share
Should Vodafone shareholders support the deal?
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Deal NPV = PV Mannesmann + PV synergies bid price
We assume that (from exhibit 11a) the present value of Mannesmann (without orange)
PV Mannesmann = 71.387 mGBP
= 112.700 mEUR
Vodafone shareholders should support the deal if deal PV value is positive.
Deal NPV = 112000 + 9598.4 (266 * 517.9) = -16163 mEUR
Based on these calculations, Vodafone shareholders should NOT accept the deal.
Who is benefiting more from the deal; Vodafone or Mannesmann shareholders?
A Mannesmann shareholder is benefiting more from the deal because the difference between
the closing rate at the 19th of October (153) and the accepted bid of 266 per share at the
17th of December is +73.8%. Mannesmann shareholders get a premium to tender their shares.The share price of Vodafone increased in the same period with 13.5% from 2.74 GBP
to 3.11 GBP. What the future will bring for the increase in post acquisition value for the
Vodafone shareholders is the question, but for now the Mannesmann shareholders are better
off.
2 What potential hurdles is Vodafone going to face to complete its acquisition of
Mannesmann? Who is going to be its most likely supporter? Who is going to resist?
Why?
There are some potential hurdles Vodafone will face to complete the acquisition. First is that
they have to convince their shareholders to give the green light for the acquisition. As we said
in our previous answers, the shareholders of Vodafone have some reasons to oppose the
proposal because of the costs but there are also a lot of opportunities there. If the takeover
does not succeed, Mannesmann and Vodafone would be direct competitors in the four biggest
markets of Europe: Italy, France, Germany and the UK, and it would make them both
potential takeover targets for their biggest competitors, who are all based in the United States.
When the bid would succeed however, they would become the worlds largest operator in
(mobile) telecommunications. They would control Europes four largest non-incumbent
operators and they would serve over 42 million customers worldwide, with the potential toserve another 510 million. Next to establishing the largest pan-European network, the merger
could lead to a superior platform for the development of mobile data and Internet services,
which are poised to become significant drivers of growth. Furthermore, they could become
the partner of choice for suppliers and other providers as well as the operator of choice for
multinational companies and consumers, because of their global reach. We will discuss the
different interest groups and potential hurdles further below.
A large stumbling block in the takeover of Mannesmann is the diversification of shareholders.
Vodafone needs to acquire 50% of the votes of Mannesmann. Exhibit 13a shows that
Mannesmann has only one large shareholder, Hutchison Whampoa (10.1%). So, Mannesmann
does not have any big institutional shareholder blocks, which is a disadvantage for Vodafone.Small shareholders have less incentive to tender their shares, because of losing post-
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acquisition shareholder value. An advantage is that 40% of the shareholders in Mannesmann
have also a stake in Vodafone and it would be easier to gain their support. Mannesmann was
committed to fully protecting the rights of Mannesmanns present employees. To get their
votes Vodafone would have to fully safeguard the existing employment rights, including
pension rights of these employees.
Esser could also have had numerous reasons to resist the deal, one of which was that he could
have been afraid of losing his job, especially because he had no pre-negotiated Golden
Parachute, a common instrument in the US and UK, which is a contract providing benefits to
a top executive in the event of losing his job because of a takeover. The other reasons he
could have had are discussed in our answer on question number three.
On the governmental level, the German chancellor expressed himself against the merger. He
might have been against the foreign ownership of a big domestic firm and, in doing so, been
protecting the rights of the workers of the firm, because of the votes of the working class. On
the other hand he might have been protecting the management of Mannesmann, who were
already against the merger and who could prove to be powerful friends in the future of hispolitical career. Prime Minister Blair, however, found himself at the other end of the table and
expressed himself in favor of the acquisition for the same reasons as the chancellor opposed
it, the workers of Vodafone had nothing to fear and the management board appreciated it
greatly.
In our view the management board of Vodafone is the greatest supporter of the acquisition,
because if the takeover will go through, they will be running the worlds leading international
mobile telecommunications operator. If the merger will not succeed however, they will be in a
potential takeover position themselves. The other supporters of the takeover are the
shareholders of Vodafone. Because of the global reach of the combined group together with
its global brand and the opportunities created by being the operator of choice for multinational
companies and consumers.
The greatest resistance will come from the target management, which advises the shareholders
of Mannesmann regarding the acquisition. Vodafone would need to invite (some of) these
board members to join the board of Vodafone as representatives of Mannesmann. They would
also need to envisage positions for Mannesmanns senior operational management and would
need to agree on the fact that there would be no redundancies as a result of the proposed
merger.
3 What are potential explanations for why Esser was resisting the deal and fighting
so hard?
One of the potential explanations why Esser was resisting the deal could simply be due to the
fact that the first bid was too low. Vodafones offer on December 17, 1999, valued
Mannesmann at 266 per share. Mannesmanns management claimed that the value per share
was around 350, which was a difference of 84 per share. So Mannesmanns management,
including Esser, calculated a price per share, which was 31.6 % higher than Vodafones initial
offer. Vodafones final offer of 266 per share had a premium of 14 percent on the daily price
per share that day and 72.2 % on Mannesmanns closing price of October 18th (the day before
speculation regarding a transaction between Mannesmann and Orange started).
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Esser could have also resisted the deal to extract the highest possible premium to satisfy
Mannesmanns shareholders. Based on this assumption, Esser fought this hard for
shareholders interests and probably not for private benefits, because Esser owned no options
and only a handful of shares. Most German CEOs, like Esser, dont profit handsomely
because of Golden Parachutes, when their companies are acquired, in contrast to the US and
UK CEOs. Maybe Esser simply had a genuine conviction that Mannesmann had moreopportunities merging with Orange, because of the Oranges CAGR of 115 percent, than
merging with Vodafone, which had a CAGR of 46.1 % and due to Oranges sophisticated
mobile data strategy.
Another potential explanation why Esser was resisting a takeover could be related to a belief
of Esser that the change of control could destroy the value of the firm. This assumption is
based on information in the case (p. 4) where it is stated that: The last prong of
Mannesmanns strategy was the belief that control was an essential element for success.
With a hostile takeover the control over the firm would change, through which the level of
success could tremendously change as well, which subsequently would have consequences for
the value of the firm. Essers view on the case was probably that his management withhimself as CEO is better able to run the company and will provide a higher degree of success,
than when the company would be taken over by Vodafone.
Finally, the protection of employees could also be a reason for Esser to try to prevent a
takeover. It could be that Esser wanted to be loyal to his employees. IG Metall Union, which
represented Mannesmanns employees, had opposed the merger, despite the fact that
Vodafone announced that it would fully protect the rights of Mannesmanns current
employees. Likewise it could be possible that Esser could be fired from his own position as
CEO. If the merger would go through, there would be a high possibility that he would no
longer be in charge of the firm anymore and that his position would be fulfilled by Gent
(Vodafones CEO).