5 January 1999
Vodafone Group plc, the U.K.'s No. 1 mobile phone service company, said it has entered
talks with AirTouch Communications Inc., the world's largest, about "a possible
merger."
The announcement followed a report in the Wall Street Journal Interactive Edition
that Vodafone offered more than $45 billion for AirTouch to top a rival bid from the
U.S.'s Bell Atlantic Corp. Vodafone gave no details and said "there can be no
assurance that any agreement can or will be reached." Vodafone, which analysts said
discussed buying AirTouch's European businesses a year ago, is seeking the San Francisco-
based company to control wireless services from Sweden to Greece. Some analysts and
investors said the solution may be for Vodafone to buy AirTouch's international units and
Bell to take the U.S. operations to build a nationwide cellular network. "I don't
seen any reason why they couldn't first sell domestic properties to Bell Atlantic and then
sell international to Vodafone," said Charles DiSanza, an analyst at Gerard Klauer
Mattison & Co. who has a "buy" rating on AirTouch.
Vodafone has long been viewed as a possible partner for San Francisco-based AirTouch
because their combined European businesses have little overlap and they are partners in
Swedish and Egyptian mobile businesses. AirTouch also has businesses in the U.S. and the
Asia-Pacific region.
"I don't think Vodafone wants the whole of AirTouch, I think that what it does want
is the European properties," said John Tysoe, an analyst at SG Securities.
"There are real benefits of scope and scale to the acquisition."
Vodafone shares rose as much as 50 pence, or 4.8%, to 1,099p. AirTouch shares rose $3 5/8
to $72.
Reports that Bell Atlantic, the largest U.S. local phone company, was in talks to buy
AirTouch first surfaced on Thursday and both companies have since confirmed the
discussions. Neither would comment on the price or when they expect an agreement.
Yesterday, AirTouch shares fell $4 3/16, or 5.8%, to $68 1/4 amid speculation that Bell
Atlantic won't pay as much as investors had hoped for the company. A $45 billion bid is
worth about $79.67 per share.
People familiar with the companies' plans said Bell Atlantic wants to avoid charges for
goodwill - the difference between book value and the price paid - that could hurt its
earnings for as long as 40 years. AirTouch has a book value of about $8.16 billion.
Buying AirTouch would give Bell Atlantic a nationwide mobile phone network to compete
better against coast-to-coast providers AT&T Corp., Nextel Communications Inc. and
Sprint PCS. Bell Atlantic and AirTouch already have a mobile phone joint venture called
PrimeCo Personal Communications LP, and Bell Atlantic's pending purchase of GTE Corp. will
add even more mobile phone customers.
Newbury, England-based Vodafone would prefer to acquire AirTouch's businesses in Europe,
where mobile phone use is higher and services operate on a single digital technology
across the continent, SG's Tysoe said. Competition is more intense in the U.S., he added.
Still, the prospect of a rival bid from Bell Atlantic may force Vodafone to launch a full
takeover of AirTouch, which also has businesses in Japan, Korea, and India.
"Would it still be worth mounting a bid for the company if you are going to sell half
of it? The answer I think is yes," Tysoe said. "What they do want is Germany,
Portugal, Spain, Italy, Belgium, and Sweden - that's enough to make it worth doing."
Either way, the prospect of a Vodafone offer "certainly puts pressure on Bell
Atlantic to increase its bid," said Kevin Roe, an analyst at ABN Amro in New York,
who believes AirTouch is worth more than $80 a share. "AirTouch is in a perfect
position of strength. They don't have to sell."
Vodafone, with a market capitalization of 33 billion pounds ($55 billion), would nearly
double its size if it bid for the whole of AirTouch, whose market capitalization is about
$39 billion. Bell Atlantic's market value is about $81 billion.
"If Vodafone can pull off that sort of deal at a reasonable price it will definitely
be seen as a positive," said Steve Jobber, an analyst at Paribas Capital Markets in
London. "$45 billion is only about a 10% premium to AirTouch's market value in
December - I think it will be in excess of that."
Vodafone, one of the U.K.'s first two mobile phone companies, has increased its overseas
business to about one- third of its operating profit as it faces more competition in
Britain. It has stakes in more than 11 mobile phone companies stretching from Fiji to
France, although it has no business in the U.S.
In November, Chief Executive Chris Gent said the company would enter the U.S. market
"if the right opportunity arises."
Vodafone has looked into buying AirTouch in the past and has already determined that the
combination would help it cut costs, analysts said.
Paribas' Jobber said talks between the two companies in 1997 came to nothing because
AirTouch was already in talks with Bell Atlantic.
Vodafone shares jumped 7.5% yesterday after it said it added a record 933,000 British
mobile phone customers in the fourth quarter, well ahead of its closest rivals and more
than triple the 241,000 it added in the year-earlier period.