Vodafone agrees to $10-bn Kabel Deutschland deal

Vodafone has agreed to buy Germany's largest cable operator Kabel Deutschland for euro 7.7 billion ($10 billion), betting on TV and fixed-line services in its biggest deal since 2007.

Announcing its second major acquisition for a European fixed-line network in 12 months, Vodafone said it would pay euro 87 ($110) per share for the group to enable it to offer more competitive packages with TV, fixed-line and broadband services to its mobile customers.

The world's second-largest mobile operator, following up its acquisition of Cable & Wireless Worldwide, is however paying a rich price for the German firm and its 8.5 million homes, which it considered buying before it went public in March 2010 at euro 22 per share.

One trader who asked not to be named said the offer, Vodafone's biggest since a 2007 Indian acquisition, valued Kabel Deutschland at 12 times enterprise value against 2013 core earnings, a 35 per cent premium to the sector.

However, this falls to 8.5 times when taking into consideration the synergies Vodafone expects to extract. “We believe this is a decent deal for Vodafone,” the trader said.

Shares in the group had been trading at euro 63 before Vodafone's initial interest was reported in February.

The UK-based company was forced to raise its offer in the last week after John Malone's Liberty Global entered the fray, forcing it to up the stakes or face losing ground to Liberty's own cable operator Unity Media and to Deutsche Telekom.

“German consumer and business demand for fast broadband and data services continues to grow substantially, as customers increasingly access TV, fixed and mobile broadband services from multiple devices,” Vodafone Chief Executive Vittorio Colao said.

“The combination of Vodafone Germany and Kabel Deutschland will greatly enhance our offerings in response to those needs.”

The board of Kabel Deutschland said it expected to recommend the offer to its shareholders, although some analysts thought Liberty Global could still return with a counter offer even though it would likely face high regulatory barriers.

Bigger chance
“The Vodafone offer has a bigger chance of succeeding over any potential offer from Liberty Global, as it will be in cash and will face no antitrust hurdles,” said a shareholder, who holds both Vodafone and Kabel Deutschland.

The investor declined to be named as it is his fund's policy not to comment in public about separate stocks.

“There remains the possibility of a counter-offer from Liberty Global, however we believe Liberty's appetite may be tempered by the significant regulatory risks of such a transaction,” analysts at JPMorgan said in a note.

The combination of Vodafone and Kabel Deutschland will result in a group with euro 11.5 billion of revenue in Germany, from 32.4 million mobile customers, 5 million broadband and 7.6 million TV customers.

Vodafone said it expected synergies from the deal to exceed an annual euro 300 million before integration costs, by the fourth full-year post completion.

Vodafone also believes there is the potential for revenue synergies of euro 1.5 billion from cross-selling products and improved customer loyalty.

Quad-play services have caught on rapidly in markets like France and Spain, where they have been pioneered by major local companies France Telecom and Telefonica.

Germany is still some way behind and buying Kabel Deutschland could allow Vodafone to steal a march on Deutsche Telekom, the traditional fixed-line group.

Cable operators across Europe including Liberty Global, Ziggo, Kabel Deutschland and Virgin Media  have been winning customers and investors with their offer of a combined package of TV, broadband and telephony services.

Their cable lines, designed to deliver TV to homes, have been upgraded to carry voice calls and Internet at speeds often five times faster than competing services from the telcos.

Bundled offers have been snapped up by customers wanting to watch television on an array of devices from TVs, laptops and tablets.

Vodafone shares were up 1.4 per cent in early trading and Kabel Deutschland was up 1.8 per cent at euro 86.
THE DEAL DIARY

• Vodafone has agreed to buy Germany's largest cable operator Kabel Deutschland for euro 7.7 bn ($10 bn)
• Vodafone said it would pay euro 87 ($110) per share
• Shares of the Kabel group had been trading at euro 63 before Vodafone’s initial interest was reported in February
• The combination of Vodafone and Kabel Deutschland will result in a group with euro 11.5 bn of revenue in Germany
• Vodafone said it expected synergies from the deal to exceed an annual euro 300 mn before integration costs
• Vodafone also believes there is the potential for revenue synergies of euro 1.5 bn from cross-selling products and improved customer loyalty