Sir Chris must bargain hard

SERIAL deal maker and Vodafone chief executive Sir Chris Gent is gazing across the English Channel at France's Cegetel. Shareholders should steel themselves for an eyewatering takeover price of £6bn to £9bn. But if Gent pays at the top end of the range, shareholders have reason for outrage.

On its own Cegetel, which owns 80% of the French mobile operator SFR, has a lot to offer. The fixed line and mobile operations are second in market share to France Telecom and its mobile arm Orange. France is among the least competitive of the major European mobile markets, with only three operators. Few potential challengers have the cash - let alone the stomach - to start afresh.

And although the fixed lines will lose £70m this year, SFR will make £1.3bn pre-interest profit. Moreover, only 63% of les Francais have a mobile phone - far fewer than most other major European markets.

Sir Christopher has a strong hand at the negotiating table. Cegetel's 44% owner - French sewage to media conglomerate Vivendi Universal - is gasping for cash. It is struggling under a £12.5bn debt mountain amassed during its quixotic attempt to become the one-stop European media and communications shop.

Vodafone is the only buyer at a time when telecoms assets are going at fire sale prices. It already has a 15% stake in Cegetel as well as the outstanding 20% minority stake in SFR.

After an industry-wide frenzy of mergers, it is the only company that has the balance sheet - and the will - to bankroll what will inevitably be an all- cash deal. Even if Vodafone pays the £9bn top whack, its resulting £22bn debt will only be twice underlying profits.

The first hurdle is to convince Vivendi to give up what has often described as one of its best assets. That depends on factors as diverse and elusive as Gallic national pride, and whether the media group can convince its bankers to shore up its balance sheet.

If - as most in the City expect - Vivendi does decide to sell, then Vodafone needs to win over BT and US telecoms giant SBC who own 26% and 15% of Cegetel respectively.

The rules of the game are fairly simple. Until September 21 BT and SBC can veto any deal. If they do approve, they have 'tag along' rights that force Vodafone to offer them the same price it offers Vivendi. After September they lose the veto, but hold the right to 'tag along' in perpetuity.

SBC, the old Southern Bell corporation, has kept relatively quiet, but BT is bargaining hard. At every opportunity, it repeats the mantra 'we are not longterm shareholders, but we are not in a hurry. It is a good asset, which we will sell when the price is right'.

For this read 'treat us well or we'll cause trouble' and this is not an empty threat. BT can afford to wait. It is one of the few telecom companies not strapped for cash, having slashed its £30bn debt mountain with a cash call and asset sales last year. And with signs that some telecoms assets are beginning to look attractive, waiting may be profitable.

Its rights as a minority shareholder give it scope for trouble. It could - for example - block Vodafone from using SFR's cash to pay down its debt or finance losses in other operations.

It also has a lot to prove. BT's new chief executive Ben Verwaayen needs to show he has made a break with BT's old guard, and banish the lingering questions over his role in the troubles at US telecoms equipment maker Lucent.

But Vodafone can easily call this bluff. It has shown more than a willingness to sit tight, holding 67% of Japan Telecom, 76% of Italy's Omnitel and a 52% of Greece's Panafon.

The biggest barrier to Sir Chris getting a good price is himself. He remains convinced of the promise of global scale and the internet, when most investors are sceptical. He needs to temper his enthusiasm for filling the last big hole in Vodafone's' European network and drive a hard bargain.