Hedge funds and Private Equity - PES

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Mobilcom
1. Company description
Mobilcom is a listed mobile communications company. It does not have its own network but
buys blocks of airtime from other carriers and resells them to its own customers. Its subsidiary
freenet.de is an Internet service provider. In 2000 the company took part in the Federal Government’s
auction of UMTS licenses (Mobile broadband network) and obtained an operating
license for €8 billion. Its turnover in the past few years has amounted to some €2 billion.
2. Economic and social effects
2.1 Private equity fund description
In 2000 France Télécom (FT) acquired a 28.5% stake in the company. FT gave a contractual
undertaking to fund the establishment of a UMTS service. At the same time, FT negotiated an
option to acquire a majority stake in Mobilcom in 2003. In 2000 Mobilcom’s losses amounted
to €89 million. These increased to €205 million in 2001. In 1997 Mobilcom had employed 220
people. By 2002 the workforce had grown to 5 500. At that time, France Télécom itself was in
debt to the tune of €70 billion. In 2001 Mobilcom began to establish its own mobile network. In
mid-2001 it had 5.2 million customers. Its debts amounted to five billion euros, and its debt-toequity
ratio was considerably higher than that of its competitors.
The funding pledges made to Mobilcom applied only to the establishment of a UMTS network.
By this time, however, all the experts agreed that Mobilcom would not make a profit from its
UMTS operations, not even in the long term.
In 2002 the government stepped in to save the company from insolvency. France Télécom now
tried to do all in its power to withdraw from its financial commitments to Mobilcom. An infringement
of the code of business practice by Gerhard Schmid, chief executive of Mobilcom, gave
France Télécom the opportunity to declare that it no longer felt bound by its existing contracts
and to go back on its pledge to finance the establishment of a UMTS network. After a lengthy
dispute, France Télécom and Mobilcom reached a compromise, whereby FT took over debts
amounting to €7 billion. The compromise deal was approved at an extraordinary general meeting
at the beginning of 2003. The costly license secured by Mobilcom in the UMTS auction had
to be returned unused to the Federal Government. At a general meeting in April 2005, Mobilcom’s
shareholders voted by a large majority to bring an action for damages against FT for having
pulled out of the funding agreements.
In May 2005 France Télécom sold 27.3% of the shares in Mobilcom to the US private equity investment
combine Texas Pacific Group (TPG) and retained a 1% share for itself. TPG obtained
three out of twelve seats on the supervisory board.
2.2 Debt structure, alteration of company
capital management fees requested by LBO
Before the planned merger with Freenet, Mobilcom once more had a high liquidity ratio as a
result of the disposal of its debts. Mobilcom’s routine business yielded steady operating profits.
This aroused the interest of the private equity investor, as did the fact that the book values of Mobilcom’s
assets were set very low in relation to their real current value. A merger with Freenet
would offer the opportunity to convert the balance sheet from book values to current values. This