Vodafone Group Plc (VOD) agreed to buy Kabel Deutschland Holding AG (KD8) after increasing its bid for Germany’s largest cable company to 7.7 billion euros ($10.1 billion) in the second-biggest takeover of a telecommunications network in Europe this year.
Kabel Deutschland’s board is set to recommend the 87-euro per share cash offer, the companies said in separate statements today, confirming a Bloomberg News report yesterday. The combination will result in synergies in cost and capital spending exceeding 3 billion euros after integration costs, Vodafone said.
Buying Kabel Deutschland would give Newbury, England-based Vodafone access to the German company’s 8.5 million connected households and potential customers for combined packages of phone, Internet and TV subscriptions. The U.K. company has been vying for Kabel with billionaire John Malone’s Liberty Global Plc (LBTYA), which last week made its own preliminary offer, said to be valued at 85 euros a share.
“They finally decided to go for it when growth expectations have re-rated and valuation’s at an absolute peak,” said Guy Peddy, a London-based analyst with Macquarie Bank Ltd. “There’s an opportunity for them to get more active in the consumer unified-conversion market space, and this offers them a route to that.”
Sales Forecast
Vodafone was interested in bidding for Kabel Deutschland in February 2010, with offers valuing the company at 5 billion euros at the time, people familiar with the matter said that year. Still, Kabel Deutschland’s share price almost tripled in the three years since that report.
Kabel Deutschland shares rose as much as 2.3 percent and traded up 1.8 percent at 85.62 euros at 1:22 p.m. in Frankfurt, while Vodafone fell 0.5 percent to 175.05 pence in London.
Kabel Deutschland today forecast sales growth of 8 percent for the fiscal year ending March 31, 2014 after revenue increased 7.7 percent to 1.83 billion euros in the previous period. Adjusted earnings before interest, taxes, depreciation and amortization will probably equal 48 percent of revenue, the Unterfoehring, Germany-based company said in a statement today.
‘Fair Price’
Vodafone’s 87-euro offer is 37 percent more than Kabel Deutschland’s closing price on Feb. 12, the day before Vodafone’s interest was initially reported, and 3.4 percent above its June 21 close of 84.10 euros. The offer includes the 2.50-euro dividend that Kabel Deutschland announced in February.
“I think it is a very fair price,” Vodafone Chief Financial Officer Andy Halford said on a conference call today. “Clearly we’re in a very low interest-rate environment, so the costs for us to fund this deal are extremely low by historical standards.”
Depending on when the deal closes, Vodafone may be able to offer new services by the end of the year or early 2014, Philipp Humm, Vodafone head of northern Europe, said on the call.
Kabel Deutschland will remain a separate legal entity after the transaction closes, and its management will take over responsibility for Vodafone’s fixed-line retail business in Germany as well as be a partner to housing associations, the German company said.
‘Ideal Fit’
“Kabel Deutschland and Vodafone are an ideal fit,” Kabel Deutschland Chief Executive Officer Adrian von Hammerstein said in a statement. “Together, we have the opportunity to become Germany’s leading telecommunications and television provider and to create what for the German market is a unique, winning combination of fixed line and mobile communications.”
Vodafone said that it expects more than 300 million euros in cost and capital expenditure synergies annually four years after the deal is completed, excluding the costs to integrate the two companies.
Vodafone will use cash and undrawn bank facilities, as well as the $3.2 billion dividend it received from its stake in its Verizon Wireless venture in the U.S. last month, to fund the offer, the company said.
The agreement would value Kabel Deutschland’s (KD8) equity at about 7.7 billion euros and produce an enterprise value, which includes debt, of about 10.7 billion euros. Vodafone initially offered 80 euros a share before going up to 85 euros and eventually 87 euros, one of the people said.
Bulking Up
Phone companies across Europe are bulking up their networks and adding services as they strive to increase customer bills and loyalty. Bundles of TV, Internet and phone service are becoming increasingly popular, stoking deals and partnerships between carriers.
Vodafone CEO Vittorio Colao is building his company’s fixed-line assets to offer the packages to more consumers and business customers. He’s fighting to reverse declining revenue as customers pay less for voice and as regulatory restrictions on call-termination rates cut into sales. The company eliminated jobs and wrote down 7.7 billion pounds ($11.8 billion) on its operations in Spain and Italy last fiscal year.
“The good news is that Vodafone shareholders can look forward to a German market that will not shrink,” Robin Bienenstock, an analyst with Sanford C. Bernstein in London, said in a note today. “More M&A must be on its way. Vodafone seems likely to look at other deals.”
Reinvigorated Operations
Vodafone, the world’s second-largest wireless carrier behind China Mobile Ltd., reached a deal in May with Deutsche Telekom AG (DTE) to use its high-speed Web network in Germany. The deal for Kabel Deutschland may mean Vodafone has to find a way to integrate two fixed-line networks and consumer offers, Enders Analysis analyst James Barford said in a note before the deal was announced.
“Buying Kabel Deutschland could help Vodafone to reinvigorate its struggling fixed-line operation,” Barford said. In Germany, the deal creates “a strong number two triple-play operator, increasing competitive pressure on Deutsche Telekom (DTE) and Sky Deutschland (SKYD).”
More than $80 billion in telecommunications and cable transactions have been announced or completed this year before today, as companies from Dish Network Corp (DISH). to Japan’s SoftBank Corp (9984). to Vodafone prowl for acquisitions. Vodafone shares have risen 14 percent this year on speculation the company will sell its stake in Verizon Wireless for more than $100 billion.
AT&T Inc., the second-largest U.S. wireless carrier, explored potential deals in the past two months including buying part of Telefonica SA (TEF) or some of its foreign assets, three people familiar with the situation said last week.
Liberty’s Deals
Liberty Global has also been snapping up cable assets around the region, completing a $16 billion takeover of Virgin Media Inc. in the U.K. earlier this month. It also has a stake in Ziggo NV in the Netherlands as well as businesses in Belgium, Austria, Ireland and Switzerland.
Should Liberty Global or another competitor make a counter offer, Vodafone has the right to match, Vodafone said in today’s statement. Kabel Deutschland’s “strategic importance” may mean that Liberty comes back with a counter offer, Deutsche Bank (DBK) analyst David Wright said.
To be sure, Von Hammerstein said in a conference call today that the company received only one “workable” offer, declining to specify why Liberty Global’s latest offer didn’t find favor.
The company has no agreement on compensation in case the deal with Vodafone falls apart, he said. The company didn’t discuss either the Vodafone or Liberty Global offers with Germany’s Federal Cartel Office beforehand, Kabel Deutschland CFO Andreas Siemen said on the call.
Regulator Concerns
Vodafone raised its Kabel Deutschland bid after the competing offer from Liberty, people familiar with the talks said. Liberty had offered about 85 euros a share, a person familiar with the negotiations said last week.
Liberty entered Germany, Europe’s biggest telecommunications market, with the acquisition of Unitymedia in 2010. It was forced to take steps such as removing encryptions and opening contracts with housing associations to rivals when it added operator KabelBW the next year to form the country’s second-largest cable operator.
Kabel Deutschland’s management may have concerns that a Liberty deal would run into obstacles from regulators. Kabel Deutschland was blocked by the German antitrust regulator from buying Berlin-based cable operator Tele Columbus Group in February.
Morgan Stanley (MS) and Perella Weinberg Partners LP are financial advisers and Hengeler Mueller is legal adviser for Kabel Deutschland. Goldman Sachs Group Inc. and UBS AG (UBSN) are working with Vodafone.
Source:Bloomberg
