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# Vodafone Mannesmann Case

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Our analysis for Vodafone Mannesmann Harvard Business case.

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• MBA Valuation Week 1
• ### Vodafone Mannesmann Case

1. 1. Corporate FinanceNovember 2012Vodafone-Mannesmann Case Gulcin Askin Michelle Donovan Kivanc Ozuolmez Peter Tempelman
2. 2. Question IBased on December 17, 1999 stock prices how much wouldVodafone shareholders contribute to the newly combined firm?
3. 3. Answer IOn December 17; Mannesmann Vodafone €234 £3.11 (€4.9569)Number of Shares;If 53.7 Vodafone shares = 1 Mannesmann share;? = 517.9M Mannesmann shares517.9 x 53.7 = 27811.2M Vodafone shares needed.27811.2M / (27811.2M + 31105M) = 47.2%Mannesmann share holders would hold 47.2% of combined firm.31105M / (27811.2M + 31105M) = 52.8%Vodafone share holders would hold 52.8% of combined firm.
4. 4. Answer IOn December 17; Mannesmann Vodafone Share price €234 £3.11 (€4.9569) Number of shares 517.9M 31105M Market Value €121 188 600 00 €154 184 374 500 Market Value of the €121 + €154 = €275B combined firm Contribution €121 / €275 = 44% €154B / €275B = 56%
5. 5. Question II - aWhat is the minimum level of synergies for Vodafone shareholders to at least break even on the deal?
6. 6. Answer 2 - a Mannesmann Vodafone Share price €145.35 €4.1860 Number of 517.9M 31105M sharesOctober 21 Excluding Market Value €75 276M €130 250M synergies Market Value of the €205 482M combined firm Share price €234 €4.9569 Number of 517.9M 31105M shares IncludingDecember 17 Market Value €121 188M €154 407M synergies Market Value of the €275 595M combined firm
7. 7. Answer 2 - aMannesmann’s contribution to the combined firm is;47.2% of €275,375 M = €129 997M.Vodafone offers €4.9569 x 53.7 x 517.9M = €137 857MThen;Premium paid by Vodafone for the synergies created = €7 860MSo;the minimum synergy created, to compensate Vodafone shareholders’ premiumpayment, should be €7 860M
8. 8. Question II - bShow that, from a merger arbitrage position, the implicit probability of deal success is approximately 60%
9. 9. Answer 2 - bOur merger arbitrage position is;October 21;-Borrow 53.7 shares of Vodafone and sell at a price of €4.1860 = €224.79-Buy 1 share of Mannesmann at price of €145.35-Profit €79.78December 17;-Sell Mannesmann share at €234-Buy back 53.7 shares of Vodafone at price €4.9569 = €266.18-Loss - €32Net profit = €79.78 - €32 = €47.78(this doesn’t take the time value of the money into account)
10. 10. Answer 2 - b Discount rate = 5.5% annual October December + €79.78 - €32 3 months discount rate = (1 + r) ^ ¼ - 1 = 1.348% - €32 discounted - €31.57If they don’t merge, the shares will be traded back at the prices of October 21, excludingtransaction costs, etc.. The NPV will be 0. x = non merging probability €79.78 * x - €31.57 = 0 => x= ~40% Merging probability => 1-x => 1-40% = ~60%
11. 11. Question II - cUsing the 60% from part b, estimate the expected synergies of the deal. Based on this estimate, should Vodafone shareholders support the deal?
12. 12. Answer 2 - c Mannesmann Vodafone Share price €145.35 €4.1860 Number of 517.9M 31105M October 21 shares Excluding Market Value €75 276M €130 250M synergies Market Value €205 482M combined Share price €234 €4.9569 Number of 517.9M 31105M December 17 shares Including Market Value €121 188M €154 407M synergies Market Value €275 595M combinedThis includes 60% probability of the merger realization.So the total synergies estimated by market is;€275B – €205B =~ €70B
13. 13. Answer 2 - cAccording to the new share structure;Mannesmann will appropriate 47.2% x €70B = €33 040MVodafone will appropriate 52.8% x €70B = €36 960MIn answer 2-a we found Vodafone pays premium for synergies €7 860M. Ascreated synergies, and appropriated part by Vodafone shareholders, are muchhigher than paid premium, Vodafone shareholders should support the deal.
14. 14. Question II - d What is the present value of the expected synergies asshown in Exhibit 10? Should Vodafone shareholders support the deal?
15. 15. Answer 2 - d Synergy as % of combined Year End firm in 2000E 2001E 2002E 2003E 2004E 2005E 2006E 2004cRevenue Synergy 0 50 153 469 656 977 1,221 1.70%Cost Associated with Revenue Synergy 0 (40) (107) (281) (328) (488) (610)Cost Synergy 0 80 200 500 656 732 879Total Operating Profit Impact 0 90 246 688 984 1,221 1,489 5.70%Savings in Capital Expenditures 0 60 147 360 420 469 506 7.80%Earnings after tax 0.00 58.50 159.90 447.20 639.60 793.65 967.85 26,884.72Total after tax synergies 0.00 118.50 306.90 807.20 1,059.60 1,262.65 1,473.85 26,884.72 110.13 265.08 647.95 790.48 875.43 949.69 17,323.35Present value of after tax synergies € 20,962.11Present value of after tax synergies in Euros € 33,097.08Vodafone’s appropriation from the synergies € 17,475.26AssumptionsWACCa 7.60%Perpetuity Growthb 4%Tax Rate 35% The paid premium by Vodafone shareholders as calculated in answer 2-a is €7 863M. The present value of the synergies as calculated above is €17 475M, and higher than the paid premium. Therefore, the synergies created return as positive NPV to Vodafone shareholders, and they should support the deal.
16. 16. Question II - eGoldman Sachs’ WACC estimate might be too low. Based onthe new assumptions, and historical data, should Vodafone shareholders support the deal?
17. 17. Answer 2 - e Synergy as % of combined Year End firm in 2000E 2001E 2002E 2003E 2004E 2005E 2006E 2004cRevenue Synergy 0 50 153 469 656 977 1,221 1.70%Cost Associated with Revenue Synergy 0 (40) (107) (281) (328) (488) (610)Cost Synergy 0 80 200 500 656 732 879Total Operating Profit Impact 0 90 246 688 984 1,221 1,489 5.70%Savings in Capital Expenditures 0 60 147 360 420 469 506 7.80%Earnings after tax 0.00 58.50 159.90 447.20 639.60 793.65 967.85 10,022.78Total after tax synergies 0.00 118.50 306.90 807.20 1,059.60 1,262.65 1,473.85 26,884.72 104.26 237.58 549.79 634.99 665.75 683.73 12,472.11Present value of after tax synergies € 15,348.21Present value of after tax synergies in Euros € 24,233.29Vodafone appropriation from the synergies € 12,795.18Mannesmann appropriation from the synergies € 11,438.11rE = 5.5% + 1.1 * 7.7% 13.97%WACC = (D/V * rD) + (E/V *rE) 13.66%AssumptionsLeverage 5.00%Perpetuity Growthb 4%Tax Rate 35%The paid premium by Vodafone shareholders as calculated in answer 2-a is€7 863M. The present value of the synergies as calculated above is €12 795M, andhigher than the paid premium.Therefore, the synergies created return as positive NPV to Vodafone shareholders,and they should support the deal.