Esser rules out white knight bid

MANNESMANN LAST night ruled out seeking a white knight to fend off Vodafone AirTouch's hostile pounds 77bn bid, promising instead to convince shareholders that its future is best served by remaining independent.

Klaus Esser, chief executive of the telecommunications and engineering company, also pledged not to erect legal barriers to frustrate Vodafone's unsolicited offer. Mr Esser said Vodafone's all-paper merger proposal was a "spectacular and risky venture".

Mr Esser made his comments after a meeting of Mannesmann's management board at which directors apparently received news of Vodafone's hostile bid in jocular fashion.

"The management board is laughing its socks off" was the loose translation of how one participant in the meeting described the reaction to the assault launched by Chris Gent, the chief executive of Vodafone.

If such levity is puzzling at what could prove to be a turning point, not only for Mannesmann, but for Germany's consensual industrial model, it also reflects the steely confidence of Mr Esser, the German company's chief executive, that he can see off the Anglo-American invaders.

Last night, Mr Esser formally responded, declaring his optimism that Mannesmann would evade Vodafone. He also claimed the all-paper offer would be a "spectacular and risky" venture, and added even a merger of equals would have little to recommend it.

As Mr Esser, his executive board colleagues and four investment banks plot a defence, there could yet be several twists unfold before any deal is done or ultimately defeated. Although Vodafone yesterday succeeded in the High Court at getting Goldman Sachs back on their side along with Warburg Dillon Read, Mannesmann has assembled an equally high-profile defence team featuring JP Morgan, Merrill Lynch, Morgan Stanley and Deutsche Bank, German's biggest financial institution.

In direct opposition to Mr Gent's assertion yesterday that Vodafone- Mannesmann represents a stronger tie-up than Mannesmann-Orange, Mr Esser is likely to begin his bid defence by highlighting value shortfalls in the UK group's proposal. That pitch is likely to get into full swing next week, once Mannesmann's takeover of Orange becomes unconditional, and legal strictures on what the German company can say publicly are lifted.

It is thought that Mannesmann will launch its defence by arguing there is more value in the company, which includes mobile, fixed-line telecoms and Internet assets in addition to its traditional engineering and automotive businesses, on a stand-alone basis.

Mannesmann and other European fixed line and mobile operators are cross- selling across large customer bases. Bundling packages of services, targeted particularly at high usage customers, can yield more gross operating profit revenue per customer than selling just mobile services.

Moreover, as an all-paper offer, the value of Vodafone's bid depends on the value of its stock. Vodafone shares closed down 8p at 275.5p yesterday, cutting over pounds 2.2bn from its pounds 79bn offer.

Vodafone's bid for Mannesmann also values Orange at nearly pounds 20 per share versus a more likely spin-off price of about pounds 13 - the mobile operator's price before its takeover.

As Mr Esser is thought to have anticipated Vodafone's intentions as long as 18 months ago, it would be surprising had he not discussed such an eventuality with other telecoms company chief executives. It is understood that Rothschilds, bankers to British Telecom, have had several executives working on scenarios where the UK company could become a partner or a white knight.

Most likely, earnings dilution, as Mr Gent reasoned yesterday, would stop BT or US carriers such as SBC Communications, from playing a white knight role. But it would still be possible for Mr Esser to do a joint venture for cash, perhaps spinning off a portion of its Accor and Infostrada fixed line operations to BT.

That would allow Mr Esser to offer cash to Mannesmann shareholders in exchange for staying loyal in the face of Vodafone's challenge. For some shareholders that could prove more attractive.

Executives at Cable & Wireless and MediaOne Group, with whom Mr Esser negotiated about the possible purchase of One-2-One, later snapped up by Deutsche Telekom, found him an able deal maker. "They found Esser a very civilised and professional negotiator," said a source. "They admired his style. Esser has characteristics, unlike other European executives, that US executives have much have in common with. He is easy to talk with on a chief executive to chief executive basis."