- Based on new assumptions of a higher WACC of 13.66% and lower expected synergies, the present value of synergies appropriated by Vodafone shareholders is estimated to be €12.8 billion. - This amount is still higher than the €7.9 billion premium paid by Vodafone shareholders for the synergies. - Therefore, even under more conservative assumptions, the synergies are expected to provide a positive return to Vodafone shareholders and they should still support the deal.

1. Corporate Finance
November 2012
Vodafone-Mannesmann Case
Gulcin Askin
Michelle Donovan
Kivanc Ozuolmez
Peter Tempelman

2. Question I
Based on December 17, 1999 stock prices how much would
Vodafone shareholders contribute to the newly combined
firm?

3. Answer I
On December 17; Mannesmann Vodafone
€234 £3.11 (€4.9569)
Number of Shares;
If 53.7 Vodafone shares = 1 Mannesmann share;
? = 517.9M Mannesmann shares
517.9 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. Answer I
On 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. Question II - a
What is the minimum level of synergies for Vodafone
shareholders to at least break even on the deal?

6. Answer 2 - a
Mannesmann Vodafone
Share price €145.35 €4.1860
Number of 517.9M 31105M
shares
October 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
Including
December 17 Market Value €121 188M €154 407M
synergies
Market Value
of the €275 595M
combined firm

7. Answer 2 - a
Mannesmann’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 857M
Then;
Premium paid by Vodafone for the synergies created = €7 860M
So;
the minimum synergy created, to compensate Vodafone shareholders’ premium
payment, should be €7 860M

8. Question II - b
Show that, from a merger arbitrage position, the implicit
probability of deal success is approximately 60%

9. Answer 2 - b
Our 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 €79.78
December 17;
-Sell Mannesmann share at €234
-Buy back 53.7 shares of Vodafone at price €4.9569 = €266.18
-Loss - €32
Net profit = €79.78 - €32 = €47.78
(this doesn’t take the time value of the money into account)

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
- €31.57
If they don’t merge, the shares will be traded back at the prices of October 21, excluding
transaction 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. Question II - c
Using the 60% from part b, estimate the expected synergies
of the deal. Based on this estimate, should Vodafone
shareholders support the deal?

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
combined
This includes 60% probability of the merger realization.
So the total synergies estimated by market is;
€275B – €205B =~ €70B

13. Answer 2 - c
According to the new share structure;
Mannesmann will appropriate 47.2% x €70B = €33 040M
Vodafone will appropriate 52.8% x €70B = €36 960M
In answer 2-a we found Vodafone pays premium for synergies €7 860M. As
created synergies, and appropriated part by Vodafone shareholders, are much
higher than paid premium, Vodafone shareholders should support the deal.

14. Question II - d
What is the present value of the expected synergies as
shown in Exhibit 10? Should Vodafone shareholders support
the deal?

15. Answer 2 - d
Synergy
as % of
combined
Year End firm in
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2004c
Revenue 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 80 200 500 656 732 879
Total 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 26,884.72
Total 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 17,323.35
Present value of after tax synergies € 20,962.11
Present value of after tax synergies in Euros € 33,097.08
Vodafone’s appropriation from the synergies € 17,475.26
Assumptions
WACCa 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. Question II - e
Goldman Sachs’ WACC estimate might be too low. Based on
the new assumptions, and historical data, should Vodafone
shareholders support the deal?

17. Answer 2 - e
Synergy
as % of
combined
Year End firm in
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2004c
Revenue 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 80 200 500 656 732 879
Total 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 10,022.78
Total 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 12,472.11
Present value of after tax synergies € 15,348.21
Present value of after tax synergies in Euros € 24,233.29
Vodafone appropriation from the synergies € 12,795.18
Mannesmann appropriation from the synergies € 11,438.11
rE = 5.5% + 1.1 * 7.7% 13.97%
WACC = (D/V * rD) + (E/V *rE) 13.66%
Assumptions
Leverage 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, and
higher than the paid premium.
Therefore, the synergies created return as positive NPV to Vodafone shareholders,
and they should support the deal.