Fight to the death in telecoms

All generals have to start somewhere. In 1983, when Racal decided to take a shot at the burgeoning mobile phone technology, the defence electronics group gave Chris Gent command of a platoon of 50 staff in a small office in Newbury. Sixteen years on, Mr Gent is still in charge but Vodafone, which Racal floated off in 1991, is now a pounds 98bn company with 24,000 staff.

In contrast, Klaus Esser's Mannesmann empire has been around for more than 100 years, originally as an engineering company but latterly with a telecoms bias. Now Mr Gent and Mr Esser, the young Turk and the old hand, have come head-to-head on the battlefield that is Europe's telecoms market. These two and the other generals of the Continent's telecoms giants are locked in a contest to divide the spoils of a market soon to be worth pounds 140bn a year.

Since Mr Gent was first given his captain's pips, the landscape of Europe's telecoms market has changed beyond recognition. Back in the 1980s, with mobile technology still confined to the lab, telecoms was dominated by the state-owned monopolies that controlled the national fixed-line networks. But by the start of the 1990s, the hegemony of gigantic corporations like British Telecom, Deutsche Telekom and France Telecom was coming to an end.

Deregulation of Europe's telecoms markets enabled rival operators either to set up their own networks or to use the infrastructure of existing companies. The other major factor was the development and popularisation of mobile phones, a boom that's brought newcomers like Vodafone into competition with the established order. What's left is a high-stakes battle for control of one of the world's most lucrative markets.

Pat Gallagher, president of BT Europe, says: "The aim for the key players is to get a footprint across Europe." Mandeep Singh of brokers ABN Amro agrees. "Being pan-European is vital. It means that companies can bundle services and achieve economies of scale," he says.

From the outset, Mr Gent adopted mobile phones as his means of conquering Europe. This year's merger with America's AirTouch and a tie-up with Bell Atlantic has cemented Vodafone's European strength with a formidable position in the US. Vodafone has been riding high, a stock market darling.

Then Mannesmann launched an agreed bid for Orange, Britain's third-largest mobile phone operator, and it all changed. Suddenly, Mannesmann's move has made Vodafone's network of shareholdings in European cellphone operators seem inadequate. Mannesmann already appeared to have a stronger presence than Vodafone in Italy, Germany and France. Now, with the acquisition of Orange, its tanks are on Vodafone's carefully tended British lawn.

One analyst, looking forward to scrutinising Orange's plans at next week's interim results presentation, says: "They've a lot to explain about the AirTouch merger and their strategy for Europe. The problem is they don't have control anywhere."

That is to say Vodafone does not have sufficient control of its investments to dictate strategy. So it is having to contemplate a takeover of Mannesmann, mindful that no foreign bidder has ever managed a successful hostile bid for a German company. If it is any comfort to Mr Gent, Vodafone is not the only company to have been thrown by Mannesmann's bid.

"The endgame for telecoms is approaching, and it's a process which has been kicked off by Mannesmann," says Mr Singh.

France Telecom is another giant that's been forced to act. Like its rivals, it can't contemplate surrendering control in any of the big four European markets - the UK, France, Germany and Italy. Hence its apparent interest in teaming up with Vodafone to launch a joint bid for Mannesmann: Vodafone would acquire Mannesmann's existing non-UK mobile interests and its traditional engineering business would be sold. France Telecom would get Orange - since Vodafone would not be allowed to have more than one mobile licence in the UK - and so gain a foothold in Britain.

Like its French counterpart, Deutsche Telekom is looking for deals to ensure its survival. Their respective governments have retained stakes in these former state-owned monoliths - thus ensuring that hostile predators are put off - but both are having to find their own way in Europe's telecoms jungle.

Deutsche Telekom, for example, no longer has a monopoly of fixed-line traffic and now has to let other carriers "piggyback" its network. This extra competition has made it vital for Deutsche Telekom to find more prof- itable markets outside Germany. Hence its purchase of One2One, the UK's fourth biggest cellular operator, which this week teamed up with Richard Branson to launch Virgin Mobile.

It was the same imperative which prompted Deutsche Telekom earlier this year to launch a doomed attempt to buy Telecom Italia, eventually acquired by Olivetti. It was a high-risk strategy which has caused a seemingly irrevocable rift with France Telecom, its erstwhile ally, and left its expansion plans in doubt. Latest reports have linked Ron Sommer, chief executive of Deutsche Telekom, with an approach to Bouygues, the French communications and construction group, as a bridgehead into that market.

Not that Roberto Colaninno, managing director of Olivetti, has been celebrating his success in acquiring Telecom Italia. Un-fortunately, like the other former monopolies, Telecom Italia has found the deregulated going tough: concerned investors have given a resounding thumbs-down to the deal, and Olivetti's share price has almost halved since the summer. Suddenly, Olivetti has been earmarked as a takeover target, though the Italian authorities are unlikely to countenance that possibility.

And then there is the wild card of Vivendi, the curious amalgam of television, environmental and telecoms businesses which its chairman, Jean-Marie Messier, has somehow to make sense of. Messier is under pressure to focus on one of his core businesses, prompting speculation that he would sell Vivendi's stake in Cegetel, the French fixed-line and mobile operator. This would have been a target for Mannesmann, Vodafone and BT, all of which have minority stakes in Cegetel. However, Vivendi is understood to be committed to its telecoms businesses, a decision that will frustrate its rivals' ambitions and raise the prospect that Messier will himself join the acquisition trail.

And then there is that old warhorse BT, another former monopoly that has been left to the ravages of the market. Although BT has a network of shareholdings across Europe similar to Vodafone's, analysts believe that BT has more control over its own destiny. No doubt it is following the Mannesmann situation with interest, but the need for BT to intervene is less urgent.

Mr Gallagher says: "People say that we've got a disparate set of shareholdings but they are very successful businesses. It would be naive of me to ignore other moves, but in the end our partnerships have been established for four or five years."

The other danger, of course, is that these vying empires become embroiled in a European dispute and ignore the looming presence of WorldCom, the American giant whose meteoric expansion has made Vodafone's growth look stunted.

Chris Gent knows that his company could be especially vulnerable if Vodafone fails to acquire Mannesmann. After all, a general is only as good as his last battle.

THE BIG BATTALIONS

VODAFONE

How did it start?

Formed in 1983 by Racal, the defence electronics group, Vodafone won one of the first two licences to operate a cellphone network before floating in 1991.

Where is it now?

Stake building in Europe and a merger with America's AirTouch followed by an assets swap with Bell Atlantic have established Vodafone as major global mobile player.

Where is it going?

Expected to launch a bid for Mannesmann, which would create Europe's biggest cellphone company. May also look for another US acquisition.

MANNESMANN

How did it start?

As a humdrum engineering company in Dusseldorf 109 years ago, making steel pipes, gears and compressor machinery before diversifying into auto parts.

Where is it now?

Still has core engineering interests but has expanded its mobile phone arm to become Europe's biggest operator. Interests include D2 in Germany, a stake in France's SFR and, soon, Orange. Also owns Germany's second largest fixed-line operator.

Where is it going?

Depends on successful integration of Orange. If shares continue to fall, could become vulnerable to a bid from Vodafone or even WorldCom, the acquisitive American operator.

DEUTSCHE TELEKOM

How did it start?

Was until recently a state-owned monopoly. Deregulation of Germany's telecommunications industry has forced DT to allow more fleet-footed rivals to use its precious network.

Where is it now?

Attempts to diversify its business have met with mixed success. Its GlobalOne alliance has not prospered, and attempts to gatecrash Olivetti's purchase of Telecom Italia failed. Bought One2One, the UK mobile phone operator.

Where is it going?

Has the handicap of its existing infrastructure, which is expensive to run. Also blighted by souring of relationship with France Telecom. However, has strong bridgehead in UK and plenty of firepower thanks to its portfolio of easily saleable assets.

FRANCE TELECOM

How did it start?

Another state-owned monopoly forced to compete with alternative providers, although the French government retains a stake.

Where is it now?

As well as existing fixed-line business in France, France Telecom has bought a 25 per cent stake in NTL, the cable giant, and is acquiring German mobile phone operator E-Plus.

Where is it going?

Held talks with Vodafone to launch a joint bid for Mannesmann. (France Telecom would acquire Orange.) Government stake probably protects it from a hostile bid.

BRITISH TELECOM

How did it start?

Came into existence in 1981 when the Post Office's postal and telecoms divisions were separated. Floated in 1984. Now has to cope with increased competition brought on by the liberalisation of UK telecoms market.

Where is it now?

As well as defending its traditional market, BT has expanded its mobile phone arm by acquiring the rest of BT Cellnet. Acquired stakes in France's Cegetel, Viag Interkom in Germany and Albacom in Italy.

Where is it going?

Linked with a rival bid for Mannesmann and may be interested in control of Cegetel, the French mobile and fixed-line operator, if Vivendi decides to sell.

OLIVETTI

How did it start?

Founded in 1908 as a manufacturer of typewriters. By the Seventies, it had grown into a formidable computer company. It nearly collapsed but has since repositioned itself in telecoms.

Where is it now?

Established alliance with Mannesmann, but key event was purchase of Telecom Italia in the face of opposition from Deutsche Telekom. Now Italy's largest telecoms company.

Where is it going?

Shares have slumped since TI acquisition, prompting speculation about a hostile bid. Angry shareholders may also try to push through a domestic merger for Olivetti.

VIVENDI

How did it start?

Founded as Compagnie Generale des Eaux in 1853, Vivendi was a humble water provider but in 1987 moved into telecoms with the launch of SFR to compete with France Telecom.

Where is it now?

Has been transformed into a hybrid of television, telecoms and environmental services. Gained control of Canal Plus, the pay-TV group, along with 25 per cent of BSkyB, and co-owns Cegetel, the principal rival to France Telecom.

Where is it going?

Under pressure to focus on one of its core businesses. Could involve flotation of its environmental business or sale of Cegetel, a decision that would unleash frenzied interest among rivals.