UPDATE: Vivendi, Vodafone Hinges on Mannesmann

MUNICH (01/31/2000) - Vodafone AirTouch PLC and French conglomerate Vivendi SA over the weekend announced an alliance that they promise will create one of Europe's key Internet businesses. The provisional agreement, however, hinges on the success of Vodafone's bid for German conglomerate Mannesmann AG.

Vivendi and Vodafone signed a letter of intent to form an Internet company in which each will own 50 percent, according to a joint statement issued yesterday.

The deal is attracting much market interest, as it looks to model itself loosely on the same logic that brought together Time Warner Inc. and America Online Inc. in a planned merger, if on a much smaller scale.

But analysts are mixed on whether the deal is a winning combination.

The new venture's goal is to establish a portal for the European markets that will give users access to content via a variety of devices, such as televisions, PCs, mobile phones, fixed-line phones as well as from Internet appliances, the companies said.

The portal will give customers access to content and services from Vivendi companies, including pay-television channel Canal+, in which Vivendi owns a majority stake, and Havas Interactive Inc., a publisher of text books as well as educational, entertainment and "how-to" software. Canal+ and Havas also have a joint venture of their interactive interests, called VNet.

The agreement also calls for Vivendi and Vodafone to explore expanding their mobile operations, and to consider developing a pan-European fixed-line network that would combine assets from Vivendi and Mannesmann.

The companies' Internet venture also plans to take an 80 percent share in an early-stage wireless Internet fund to be established with Japan's Softbank Corp.

An analyst from Jupiter Communications Inc. liked the combination of Vivendi's content with the two companies combined base of mobile phone subscribers.

"This deal makes a lot of sense," said Olivier Beauvillain, associate analyst with Jupiter Communications in London who covers the French Internet market.

"The deal brings Vivendi the opportunity to have its content reach 50-60 million mobile phone subscribers," he said. Jupiter sees a big future for mobile phones as deliverers of interactive content.

Vodafone has some 48 million subscribers to its mobile phone networks worldwide, with Vivendi contributing another 8 million mobile subscribers through its interests in the French carrier Societe Francaise du Radiophone (SFR), an attractive base of users for interactive content via mobile phone, Beauvillain said.

Indeed, if the transaction between Vodafone and Vivendi is successful, they will win joint control of SFR. Under the terms of the agreement, Vodafone will sell Vivendi for "fair value in cash" a 7.5 percent stake in Cegetel SA, the French mobile and fixed-line telecommunication operator.

That would give Vivendi a majority control of Cegetel, as it already owns a 44 percent share in the French carrier. On top of that, Cegetel itself owns 80 percent of SFR, and Vodafone owns the remaining 20 percent. Vodafone can only sell the stake to Vivendi if it acquires Mannesmann, however. The German conglomerate owns 15 percent of Cegetel.

Less convincing, Beauvillain said, is the companies' claim that they will be able to offer content to the PC audience. "Neither company owns a relationship with those users," he said.

Another analyst gives the deal a firm thumbs-down, however.

"Vivendi is not the right player for Vodafone," according to Lars Godell, European telecom analyst with Forrester Research Inc. in Amsterdam, calling Cegetel an also-ran in the French ISP market. "They are not a quality fixed-line player."

He also warned of the danger of Vodafone linking up with an "unfocused conglomerate" that gets 35 percent of its revenues from waste management activities.

The biggest reason for Godell's disapproval of the deal, however, is that he still sees the PC, with users dialing up over fixed-lines, as the main way to for European consumers to access the Internet over the next three years.

Forrester predicts that over the next several years, only 2 percent of Europe's population will use their mobile phones to access interactive content. Users are bandwidth hungry, Godell said. Current download speeds of wireless devices are well below what PCs provide, and just do not match what users want, he added.

"There is a lot of hype with mobile phones and still a lot of obstacles to overcome," he said.

Whatever the market thinks, the deal between Vivendi and Vodafone makes little sense if the U.K. mobile carrier's bid for Mannesmann fails.

"There are a lot of uncertainties here, this is subject to the success of the Mannesmann takeover," Jupiter's Beauvillain said.

Vivendi and Vodafone's letter of intent calls for them to sign a more detailed contract by June 30, 2000. This will only happen, however, if Vodafone acquires more than 50 percent of Mannesmann, the companies said.

Neither company appears to want to immediately tighten the loose cooperation they have just announced. Vodafone even agreed not to acquire interests in Vivendi without its approval for the next three years. Exceptions to that agreement include if the Mannesmann bid fails, or if a third party bids for or acquires more than 15 percent of Vivendi.

Vodafone announced its offer for the German conglomerate in November, but has not yet convinced Mannesmann Chairman Klaus Esser that the deal is in his company's interest. [See "Mannesmann Fights Vodafone Takeover," Nov. 29,1999.] Mannesmann has reportedly even held merger talks with Vivendi in an attempt to ward off Vodafone's hostile takeover attempt.

Vodafone AirTouch, in Newbury, England, can be reached via the Web at http://www.vodafone-airtouch-plc.com/. Vivendi, in Paris, is at +33-1-71-71-10-00, or at http://finance.vivendi.com/. Mannesmann, in Düsseldorf, is at +49-211-820-0, or at http://www.mannesmann.de/.

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