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Vodafone Case

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Q1 Answer: For the economic rationale, first, the attraction of Orange was its spectacular growth of CAGR of 115% over 1994-1998, the fastest growth rate among all UK operators and the third largest wireless operator in UK. Thus from the acquisition, Mannesmann could achieve high inorganic growth in UK markets, which suits Mannesmann’s business strategy to become a leading telecommunication company focused on
European market. Second, Orange adopts aggressive market mobile services strategy, as it recently announced plans for developing a single global internet platform. Mobile segment had experienced a very high growth (CAGR of 52% from 1990 -1999) and data traffic on mobile networks was less than 2% in 1999 but forecast to increase to 45% by 2003. DoCoMo in Japan had launched mobile internet service “i-mode” and its ARPU increased 25%. Mannesmann could assume the same 25% ARPU enhancement upon the launch of Orange’s similar mobile service internet platform.
We believe Mannesmann underpay for acquiring Orange. Although referring to past mobile transaction table, which assumes control premium - Exhibit 8, Mannesmann was relatively paid more as EV/Sub is
8,857x and EV/POP is 533x, which are higher than means for controlling deals, which are 6,530x for EV/sub and 330x for EV/POP in Europe and 4,569x and 203x respectively in U.S.
However, transaction in same industry doesn’t necessarily reflect firm-specific characteristics, thus we developed a proximate synergy valuation model based on Goldman Sachs’ valuation on synergy of
Vodafone&Mannesmann (V&M) deal. First, we calculate V&M’s synergy value of £28,891 million from all the parameters from Exhibit 10 in the case (detailed DCF valuation referred to Appendix 1). Second, we derived synergy for mobile data business of £5,778 million from Lehman Brother’s 20% estimation based on Goldman Sachs’ valuation. Third, we infer O&M’s mobile data business synergy from V&M’s £5,778 million synergy based on different combinations of mobile subscribers’ number and ARPU enhancement from the specific O&M deal. Referring to our Appendix 2, we build a Mobile Subscribers Schedule for
Vodafone, Mannesmann and Orange based on their country presences. For “Population Growth Rate”, we take the assumption from the World Bank; for “Mobile Penetration Rate”, we assumed 15% annual growth rate, as all the countries are developed countries that enjoy high mobile usage growth. For each operator’s market shares in different countries, we assigned different growth rate. For example, for D2 in Germany, which Vodafone controls 35% and Mannesmann controls 65% of the company, we assumed 2% increase of
D2’s market share in Germany due to its integrated telecommunication strategy that could increase customer’s satisfaction and hence increase new users’ subscription. However in U.S., where Vodafone controls 45% of Alliance and the rest controlled by Bell Atlantic, we assumed 2% decrease of Alliance’s market share in U.S., as U.S. telecom market is highly fragmented and it faces tough competition from AT&T, who could use aggressive acquisition strategy to seize more market shares in U.S. In Japan, where Vodafone controls 69.7% in Digital Phone Group, due to DoCoMo’s successful “i-mode” platform, Digital Phone Group is assumed to lose 3% market shares annually. For Orange’s shares in UK market, due to Orange’s aggressive strategy to explore mobile data business, we assumed 3% increase annually for Orange’s UK market shares.
For the rest market shares assumptions, due to the lack of obvious catalysts, we assume the market shares remain flat. As a result, the estimated combined number of mobile subscribers for V&M, without synergy is
86,507,000 in 2005E and 76,248,000 for O&M, by further plugging in the implied synergy for the additional increasing in number of mobile subscribers, derived from synergy on EBIT1 in 2005E, the final estimates of combined numbers of mobile subscriber are 94,534,000 for V&M and 83,323,000 for O&M in 2005E. So far, we calculate mobile data business synergy for O&M, which amounts to £5,093 million
(5778/94534000*83323000), with all the estimates are based on 2005E because we believe 6 years provide reasonable times to stabilize the synergy. Finally, we add 25% as ARPU enhancement from the specific
O&M deal due to Orange’s specific mobile internet platform in the pipeline. Hence, the final synergy value
1 Synergy on revenue is a better approach, as number of mobile subscriber is a key driver for revenue. However, the case is lack of revenue estimates, thus we use EBIT as proxy to revenue. We believe EBIT or revenue approach to infer number of subscriber is feasible for the case as
V&M deal doesn’t necessarily have ARPU enhancement, which is another revenue driver, as Vodafone doesn’t have any mobile data strategy yet; EBIT=EBITDA-Depreciation and Depreciation is assumed to be equal to capex, as Goldman Sachs estimated in Exhibit 11a notes. for O&M deal, assume all from mobile data business, is £6,366 million. As Goldman Sachs gives intrinsic value of £17,730 million for Orange according to Exhibit 11b, the total value by adding Orange stand-alone value and synergy value is £24,096 million. As Mannesmann spends £20,000 million in acquiring Orange,
Mannesmann underpay for the deal.

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