The details of Vodafone's link with AirTouch
Ninety-eight years ago, Guglielmo Marconi sat on a Newfoundland hill and, pressing a speaker close to his ear, listened to a wireless transmission from England. The young Italian's genius helped spark a telecommunications revolution that begat vast industries on both sides of the Atlantic.
Largely responsible for the word 'globalization' entering the vernacular, telcos have themselves outgrown continental boundaries. When the prize is nothing less than a worldwide market, scale is everything.
So it wasn't a complete surprise when UK mobile phone powerhouse Vodafone and San Francisco-based wireless giant AirTouch agreed to merge earlier this year. In a stroke, they created Vodafone AirTouch plc, by far the world's largest mobile phone group, with some $110 bn in market capitalization, combined revenues of around $11 bn and over 29 mn customers worldwide.
Rumors of an AirTouch takeover had radiated through the markets on a fairly regular basis. In the fall of 1998, Chris Gent, chief executive of Vodafone and Sam Ginn, CEO of AirTouch, met several times in an attempt to fashion a deal. Each time, they went home empty-handed. By January, however, events had conspired to force a showdown.
Rumors of suitors
High noon arrived New Year's eve, and April Walden's phone was glowing. CNBC had reported Bell Atlantic would buy AirTouch. Investors wanted to hear from Walden, the director of investor relations at AirTouch, whether the rumors were true.
'The fact is, no definitive agreement had been reached,' Walden confirms. 'From a communications perspective we had to rely on our long standing policy of not commenting on rumors or speculation.'
Having a standard policy in place served AirTouch well. Over the next two weeks, the market would seethe with speculation – often fueled by financial media reports. To avoid selective disclosure, the IR team had to stick close to terse press releases. On January 3, AirTouch acknowledged it was in talks with Bell Atlantic.
Meanwhile, AirTouch's financial advisors (Morgan Stanley) quietly warned Vodafone's (Goldman Sachs International) that if Vodafone was still keen on AirTouch, it had better make a specific proposal pronto.
Vodafone did. It came in with an offer giving AirTouch shareholders half of an American Depositary Share and $6 in cash for each AirTouch share. Once again, however, the deal was leaked to the media. On January 5, following a Wall Street Journal story, and concern expressed by the London Stock Exchange, AirTouch admitted Vodafone had jumped in with a proposal. AirTouch was now the subject of a bidding war.
Marching toward a national cellular 'footprint' story, IR at AirTouch had to change gears. 'Suddenly, we weren't sure how it was going to go,' says Walden. 'All we could say was the board would do what was in shareholders' best interest.'
For their part, investors seemed to think a Vodafone combo trumped Bell South. If a national 'footprint' with Bell South seemed big, the global reach with Vodafone was bigger. After Vodafone's rival offer became public, both AirTouch and Bell Atlantic shares slumped over concerns about the price Bell Atlantic would be forced to pay and EPS dilution. Also clouding the issue was Bell Atlantic's existing $53 bn agreement to merge with GTE and the potential for antitrust concerns.
Meanwhile, reports of MCI WorldCom interest circulated and the Financial Times reported that Vodafone was sounding out investors about the idea of raising its bid if necessary. This time, however, AirTouch stuck to its 'no comment' policy on market speculation.
AirTouch's board declared January 15 as the deadline for final proposals. Bell Atlantic's merger proposal varied but by the week of January 10, it amounted to a collared share exchange worth about $80.08 per AirTouch share. In the meantime, it became clear a Vodafone deal could be all but clinched if the UK company were to sweeten the cash consideration. Immediately prior to the January 15 AirTouch board meeting, Vodafone bumped up its offer to $9 in cash making the proposal worth roughly $97 per share. Hours later, Bell Atlantic conceded defeat, and a Vodafone/AirTouch merger was approved. In press releases, top brass from both companies bubbled with enthusiasm for the deal, noting their shared vision of mobile communications as the future's principal platform for voice and data communications and Vodafone AirTouch's distinct ability to leverage its size and financial resources.
Now, regulators in both countries must approve the deal, as must shareholders at meetings set for late May. Officials hope to ink the final stroke on the deal no later than July.
The shoe fits
The circumstances of the Vodafone/AirTouch deal appear to bolster the orthodox IR argument for the current wave of telecom mergers: that insufficiently gigantic companies could be marginalized. While each transaction had made strategic sense in its own right, Vodafone's financial clout gave it the edge to snatch AirTouch from Bell Atlantic's arms.
'Both deals had different rationales,' says Andrew Beale, the London-based executive director for telecoms research at Lehman Brothers. 'But at the end of the day, Vodafone could always afford to pay more than Bell Atlantic and Bell Atlantic knew it.'
Given their strong core operations and complementary overseas interests, Vodafone and AirTouch have long been seen as potential merger partners. For Beale, the Vodafone/AirTouch deal makes good strategic logic. 'You create a supercharged global company with better growth prospects and a much stronger cellular portfolio,' says Beale. The new company will have a significant presence in the UK, US, continental Europe and Asia-Pacific. Beale adds, 'AirTouch was cheap compared with European cellular valuations.'
At the same time, the scale and compatibility of the combined operations represent potentially significant cost and revenue synergies. On the cost side, according to Mark Lambert, co-head of European telecom research at Merrill Lynch, purchasing power is greater, billing systems can be integrated, and there may be efficiencies in pooling international 'roaming' traffic.
'On the revenue side, more traffic is kept in-house on the Vodafone/AirTouch network,' adds Lambert. 'That lets you achieve a higher gross margin and ultimately offer a lower price.'
While the deal means more global opportunities, Lambert cautions that it still leaves holes in the North American network. 'A key challenge facing Vodafone AirTouch will be to continue the strategic direction AirTouch and Bell Atlantic were pushing toward,' says Lambert, referring to planned expansion in the US. 'That push is absolutely critical.'
While management must grapple with new business solutions, daunting IR tasks lie ahead. Joining the ranks of US firms acquired by overseas companies, such as Chrysler and Amoco, AirTouch will now have to wave goodbye to its place in the S&P 500. With index funds selling their shares, new demand must be found to absorb that supply.
AirTouch's Walden says the new company will appeal to global fund managers and her first priority is making sure US investor interest remains high. 'A $100 bn company with a strong growth profile is attractive and hard to find,' says Walden. 'We have great assets to work with. We just have to get out and sell them.'
Doing so effectively will mean integrating investor relations departments to best meet the needs of different audiences. While visions of a wireless future are similar, shareholder bases are not. Carved from a Baby Bell, AirTouch has about half a million retail shareholders. Vodafone has about 40,000 shareholders in total. For now, Vodafone reports bi-annually, but the new company promises quarterly reporting within two years.
Fortunately, Vodafone has done diligent IR spadework and is a closely-watched stock on both sides of the Atlantic. With a depositary receipt program in place since 1988, US shareholders now own some 20 percent of Vodafone's stock and the company's senior management team tours the US twice yearly. Recently, the news has been good. Once the merger was officially announced, communications with US and UK institutions ramped up.
Ready & able
'The key is to have a constant IR program so when you come to something like a merger, you are prepared and talking with people you already meet regularly,' says Terry Barwick, director of corporate affairs at Vodafone Group. 'Although a British company, we are well known to the US investment community because of our DR program.' In fact, a DR was vital to a fair Vodafone valuation. Analytical expertise in the sector was almost exclusively in the US until well into the 1990s.
Cellular phone company stock prices have regenerated since their dog days in the early 1990s. Today, as any busy investment banker can attest, global demand for cellular phones is growing. With its international ventures from France to Fiji once again racking up impressive gains, AirTouch earned record profits in the first quarter of 1999 while adding a record 1.1 mn subscribers.
As for Vodafone, its customer growth continues at a similarly blistering pace. Senior executives are no doubt looking forward to Vodafone Derby Day at fabled Epsom Downs June 5. After all, how better to celebrate a jump on competitors and greet new stakeholders than at a horse race?