Vodafone Pounces on Liberty Cable Assets in €18.4B Deal

Takeover would threaten Deutsche Telekom's fixed-line dominance in Germany and make Vodafone a much stronger force in other eastern European markets.

Iain Morris, International Editor

May 9, 2018

6 Min Read
Vodafone Pounces on Liberty Cable Assets in €18.4B Deal

Mobile giant Vodafone has struck an €18.4 billion ($21.8 billion) deal to acquire Liberty Global's cable operations in Germany, the Czech Republic, Hungary and Romania and instantly create one of Europe's biggest operators of both fixed and mobile networks.

The deal comes after weeks of speculation and would produce a huge rival to German incumbent Deutsche Telekom besides bolstering Vodafone's fixed-line capabilities in several eastern European markets. (See Will Liberty & Vodafone Strike a Deal? What Will It Mean for Headcount?)

The agreement with Liberty Global Inc. (Nasdaq: LBTY), one of Europe's biggest operators of cable networks, marks a continuation of Vodafone's M&A-fueled convergence strategy, which has already involved the acquisition of cable assets in Spain and Germany.

It will leave Vodafone Group plc (NYSE: VOD) with around 54 million cable or fiber customers and a next-generation network reach of about 110 million homes and businesses, said the operator in a presentation.

The transaction is largely about improving Vodafone's position in Germany, where the incumbent national operator Deutsche Telekom AG (NYSE: DT) currently markets broadband services to around 30 million homes.

Unitymedia, Liberty's German subsidiary, would be added to the Kabel Deutschland business that Vodafone acquired in a €7.7 billion ($9.1 billion) deal in 2013, allowing Vodafone to market next-generation broadband services to nearly 24 million homes.

Under previously announced plans to extend "gigabit" network offerings to around 1 million German homes, Vodafone is pushing for a gigabit coverage target of 25 million homes by 2022. "This represents more than two thirds of the German government's 2020 fiber vision for gigabit connectivity across the country," said Vittorio Colao, Vodafone's CEO, in a call with analysts this morning.

Figure 1: Vodafone Group CEO Vittorio Colao: 'Vodafone will become Europe's leading next generation network owner, serving the largest number of mobile customers and households across the EU.' Vodafone Group CEO Vittorio Colao: "Vodafone will become Europe’s leading next generation network owner, serving the largest number of mobile customers and households across the EU."

The move would obviously add to the pressure on Deutsche Telekom, which has continued to lose broadband market share to cable operators touting higher-speed offerings, its financial results showed today.

Timotheus Höttges, Deutsche Telekom's CEO, has previously lashed out at suggestions Vodafone might buy Unitymedia, urging regulators to block any takeover move. (See Vodafone's Colao, DT's Höttges Lock Horns in Barca.)

"History makes this deal unacceptable," he told reporters during a press conference at the Mobile World Congress in February. "If Liberty and Vodafone come together, they will create a monopoly in the cable market."

As Höttges points out, German authorities previously broke up a national cable network owned by Deutsche Telekom. A merger between Vodafone-owned Kabel Deutschland and Unitymedia GmbH would be a form of German reunification, canceling out the earlier regulatory move. (See Vodafone-Liberty Merger Doubtful in Germany, Says Analyst.)

Vodafone and Liberty, however, believe the lack of overlap between the two cable footprints gives regulators little reason to oppose a deal.

"Deutsche Telekom's position that this is creating a cable monopoly does not make sense because there is no overlapping cable footprint, but I can understand why they don't like it," said Colao on today's call.

He also told analysts that any regulatory decision would be taken at the European Union level. "The EU has been in favor of traditional multi-country pan-European tech players and this is the creation of one," he said. "Deutsche Telekom controls between 65% and 70% of revenues between retail and wholesale and this creates a powerful competitor, which is in the interests of the regulator and consumers."

Despite the optimism, analysts on the call expressed concern that regulators might compel Vodafone to provide wholesale offerings on its enlarged cable network as a condition of the merger. Market-research firm CCS Insight, meanwhile, reckons any tie-up in Germany may struggle to secure regulatory approval.

"We strongly believe that regulators will block or restrict the deal," said Paolo Pescatore, an analyst with CCS Insight, in a research note. "Vodafone and Liberty Global have a relatively solid presence in the fixed-line and TV markets, so any move would cut the number of companies in both segments."

Addressing anxiety around wholesale regulation, Colao said that any such measures would not be a red light for the deal. "If it has to come, there is the upside of wholesale revenues that would come with it, and so more competition to the incumbent at the wholesale level," he said.

Next page: Merger metrics

Merger metrics
On the mechanics of the deal, Vodafone said it would fund the takeover using a mixture of cash, new debt facilities and around €3 billion ($3.6 billion) in mandatory convertible bonds. This would increase Vodafone's net debt to between 2.8 and three times annual EBITDA, from a level of 2.1 previously, but Vodafone says the attractions of the deal outweigh any concerns about leverage.

At a fee of €18.4 billion ($21.8 billion), it is paying around 12.5 times operating free cash flow for the Liberty assets, a multiple that Colao described as "highly attractive."

Vodafone expects the merger of operations to lead to annual cost savings of €535 million ($634 million) by the fifth year following the deal's completion, which is expected to occur in mid-2019. It is also guiding for revenue "synergies" of about €1.5 billion ($1.8 billion) from cross-selling opportunities.

The cost saving targets will fuel concern about layoffs, with Vodafone indicating that it expects to make cuts in areas including network operations, IT, central services and marketing and advertising.

Vodafone has yet to report full-year figures for its fiscal year ending in March, but had a total of 111,556 employees on its books worldwide in March 2017. Liberty Global employed 26,700 workers at the end of last year, following the separation of its Latin American business, which had 10,300 employees in late 2017.

The combined figure of 37,000 employees is sharply down on the 41,000 staff members that Liberty flagged in late 2016.

Outside Germany, the takeover of Liberty's assets will "transform the mobile-centric position in eastern Europe," said Colao.

CCS Insight's Pescatore said the overall deal was "not game-changing" but underlined the need to have both fixed and mobile assets to succeed in "a rapidly converging world."

Besides allowing Vodafone to market packages of fixed and mobile services to its customers, and dissuade customers from defecting to rivals with similar capabilities, the acquisition of fixed-line assets may support Vodafone's 5G strategy in future. (See Europe's Backhaul Black Hole Looms Above 5G.)

Want to know more about automation? Check out our dedicated 5G content channel here on
Light Reading.

A next-generation mobile technology, 5G will deliver much higher-speed services to consumer and business customers but is likely to need ultra-fast broadband lines for the "backhaul" connections between basestations and core network systems. Fixed-line infrastructure might even be needed for so-called "fronthaul" links between radio sites and signal processing equipment.

Without its own fixed-line infrastructure, Vodafone is forced to rely on wholesale arrangements with Deutsche Telekom and other fixed-line operators in the region. In its presentation, Vodafone said that about €105 million ($124 million) of the projected cost savings would come from reduced wholesale payments on unbundled local loops and "bitstream" access.

Vodafone's share price was up 1.2% in London this morning on news of the deal with Liberty.

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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