Vodafone poised for pounds 42bn alliance with US operator

A pounds 42BN MERGER or alliance between Vodafone, the UK'S largest mobile phone operator, and Airtouch, the second-largest operator in the United States, looks to be on the cards. No announcement is expected in the next few days, but more than 30 leading City brokers and analysts left yesterday on a three-day guided tour of Vodafone's operations in the Netherlands, Germany, France and Sweden.

A Vodafone spokesman said it was company policy not to comment on rumours, but he did not dispute that the logic of a link between the two companies is compelling. Vodafone is strong in Northern Europe, including Germany, the Netherlands and Sweden, while Airtouch's main European businesses are in Spain, Portugal and Italy.

Chris Godsmark, telecoms analyst at Henderson Crosthwaite, said yesterday that the logic of such a deal, if it goes ahead, was unarguable. "Vodafone's strategic objective is to become the dominant global mobile telephones operator," said Mr Godsmark.

The two companies are said to have held talks last year but were unable to agree terms because of the size differential between the two businesses. Although both companies have been affected by the sharp falls in stock values on both Wall Street and in London in the past month, Vodafone's share price has more than doubled in the past year and it is now slightly the larger company, with a market capitalisation of pounds 23bn against Airtouch's pounds 19bn.

A full merger is thought to be just one of the expansion plans being considered by Vodafone's chief executive, Chris Gent, as part of his strategy of turning Vodafone into the leading global player.

A second possibility is a deal which falls short of a full merger, but which pools the two companies' overseas operations in a joint company while leaving Vodafone is full control of its UK operations and Airtouch maintaining its US domestic business, which is focused on the Pacific Coast.

Transatlantic telecoms mergers have been discouraged in the past by the absence of any genuinely national operators and also by technical differences between the US and UK systems, which operate on different frequencies. Plans for UMTS, a third generation of mobile phones that will make possible a common standard, are due to be published next year.

A third option being discussed in the City is a joint bid for Airtouch from Vodafone and WorldCom, the US telecoms giant which last year outbid British Telecom for control of the US long-distance telecom operator, MCI. WorldCom would take over Airtouch's US domestic operations and Vodafone would take over its European operations to create a single strong presence in Western Europe and replace the current network of national franchises with a genuine single market.

Analysts admit, however, that WorldCom will have its hands full implementing the takeover of MCI and that this suggested carve-up could be a stalking horse created to strengthen Vodafone's hand in direct talks with Airtouch.

Mr Gent has discussed the possibility of a deal with Airtouch as one possible way of carrying forward the company's known ambitions to become the world's leading mobile telephones operator.