LONDON (CNNfn) - Germany's Mannesmann confirmed Tuesday it is in talks with Hong Kong's Hutchison Whampoa to buy U.K. mobile-phone subsidiary Orange. Orange has a market value of around 16 billion pounds ($26.6 billion).
A deal, if it comes off, would be the second time in just a few months that a U.K. operator has been snapped up by a German firm. However, analysts told CNNfn.com the talks could precipitate a bidding auction, or even make Mannesmann a bid target itself.
Andrew Moffatt, telecom analyst at ABN Amro pinpointed Vivendi (PEX), Telecom Italia Mobile and, in particular, France Telecom (PFTE) as other parties interested in Orange.
"Orange's strategic value is very high," commented Moffatt, pointing out that the next generation of U.K. cellular licenses, UMTS, due to be auctioned next year, will almost certainly go to existing service providers. "That will be a new dawn for the industry," according to Moffatt.
Orange confirmed to CNNfn.com it had received an approach, and its stock soared almost 8 percent in London Tuesday. Fears that Mannesmann will have to pay a hefty premium to secure the company weighed on Mannesmann stock in Frankfurt, dragging the price down 4 percent.
ABN's Moffatt calculated that at the current price a deal would value each Orange subscriber at about $5,830, relative to the $5,000 per subscriber paid in August, when Mannesmann's archrival on the domestic front, Deutsche Telekom, acquired U.K. cellular operator One-2-One in a $13.6 billion deal. Mannesmann had dropped out of the bidding, citing the high price. Moffatt said a knockout offer would have to be around $6,500 per subscriber.
Mannesmann in play?
Mannesmann's move could put the German company itself in play though, with the potential that the world's largest cellular company, U.K.-based Vodafone AirTouch (VOD), could step in to acquire the company and extend its continental European operations. Vodafone would not dare allow Mannesmann to become a major European player, according to analysts.
"This is a do-or-die situation for Vodafone," commented ABN's Moffatt.
Cross-border deals and alliances have proliferated in the European telecom market, not just in cellular, as formerly national players have sought to gain critical mass and exploit the burgeoning demand for voice and data services. A key theme of the recent Telecom 99 conference in Geneva was the convergence of wireless and Internet communications, with technology gurus such as Bill Gates of Microsoft (MSFT) and Larry Ellison of Oracle (ORCL) predicting Internet access from mobile handsets will be the next technology leap.
The talks come amid a recent wave of blockbuster deals in the U.S. telecom industry - including MCI WorldCom (WCOM) Inc.'s planned $115 billion buyout of rival Sprint (FON) - and a parallel trend towards consolidation in the European telecom sector.
The deal would wed the third-largest mobile phone operator in Britain with Germany's number-one wireless company. A combined company would have a subscriber base of more than 10 million people, the newspaper said.
With 3.1 million subscribers, Orange (ORA) trails Vodafone Airtouch (VOD) and British Telecommunications' BT Cellnet unit in the U.K. Orange also has a number of holdings in other cellular service operators across Europe.
Hutchison Whampoa is Orange's largest shareholder, with 45 percent of Orange's equity. The rest of the company's capital is publicly traded.
Orange shares have been strong performers on the London stock market, and the company's distinctive marketing and innovative strategy under chief executive Hans Roger Snook, has taken it to third place in the U.K. rankings, despite it being the last of the four U.K. operators to commence operations.
Snook has pushed through a unique strategy for the development of cellular in Britain, with a strong emphasis on rapidly developing the number of base stations carrying the network.