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Vodafone-Liberty Merger Doubtful in Germany, Says Analyst

For all the banker excitement about a possible tie-up between Vodafone and Liberty, any deal in Germany seems highly unlikely.

Iain Morris

April 25, 2018

6 Min Read
Vodafone-Liberty Merger Doubtful in Germany, Says Analyst

Telecom alpha males Vittorio Colao and Timotheus Höttges looked ready for a cage fight at Mobile World Congress, amid reports that Colao's Vodafone could try to merge its German business with the Teutonic subsidiary of cable giant Liberty Global. "Unacceptable," spat Höttges, the boss of German telecom incumbent Deutsche Telekom, on first hearing of the news. "I have to be careful not to become personal," Colao whispered menacingly in response. (See Vodafone's Colao, DT's Höttges Lock Horns in Barca.)

But they needn't have become so territorial, according to analyst firm CCS Insight. In a research note published today, CCS expresses doubt that any German tie-up between Vodafone Group plc (NYSE: VOD) and Liberty Global Inc. (Nasdaq: LBTY) will ever go ahead. "We strongly believe regulators will block or restrict [it]," says the company. "European regulators have set precedence on this matter with other failed moves."

Figure 1: German Fisticuffs The bosses of Deutsche Telekom and Vodafone have been in combative spirits about dealmaking in Germany. The bosses of Deutsche Telekom and Vodafone have been in combative spirits about dealmaking in Germany.

The implication is that any deal between Vodafone and Liberty may end up being restricted to other eastern European markets where both companies operate networks. Having held fruitless talks about a possible merger way back in 2015, Vodafone and Liberty confirmed they were having another chinwag about "certain overlapping continental European assets" in February. (See Vodafone in Talks to Acquire Liberty Global Assets and Vodafone, Liberty Call Off Asset-Swap Talks.)

Since then, most of the media speculation has focused on the likelihood of a game-changing deal in Germany. Vodafone already operates that country's second-biggest mobile network, behind Deutsche Telekom, and has marched into the fixed-line market through its 2013 takeover of Kabel Deutschland, then Germany's largest cable network. Liberty, meanwhile, operates a network that passes nearly 13 million homes, or less than a third of the German total. A marriage could produce a formidable rival to Deutsche Telekom. And wedding bells might soon ring, according to the Financial Times, which carried a report last weekend that a deal looks imminent.

Bankers have been salivating over the prospect of a German alliance, according to that FT report, with analysts noting that it would turn Vodafone into a mainly German company. In fact, Germany is already Vodafone's biggest national market by sales, generating more than €10 billion ($12.2 billion) for the operator in its 2016/17 fiscal year (ending in March 2017), or more than a fifth of the group total. Nevertheless, in possession of Liberty's Unitymedia-branded German subsidiary, which made €2.7 billion ($3.3 billion) in 2017, Vodafone would, indeed, look even more Germanic. Analyst firm Bernstein estimates that 40% of Vodafone's profits would come from Germany following a Unitymedia GmbH takeover.

Alas, it will probably never happen, according to CCS. The analyst firm points out that consolidation-averse European authorities have blocked several in-country deals in recent years, including a Three UK bid for Telefónica UK Ltd. in the UK and a move by Kabel Deutschland GmbH (in its pre-Vodafone days) for Tele Columbus, another German cable operator. In their view, mergers that reduce the number of players serving a particular market are bad news for customers. "Ultimately, any agreement would result in just two multiplay providers [Deutsche Telekom and Vodafone], in addition to one mobile champion (Telefónica) as well as one dominant pay-TV company (Sky), and lead to stringent conditions and remedies," says CCS in its research note. (See EC to Stop Hutchison Buying Telefónica UK – Report.)

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This does hold out the possibility of an agreement, of course. Somewhat schizophrenic, European regulators have waved through some deals that could have been skewered on a different day of the week, including Telefónica's acquisition of E-Plus, then Germany's fourth-biggest operator, in 2014. That deal was only allowed after Telefónica promised to give up spectrum and rent capacity to mobile virtual network operators, however. The concern must be that stringent conditions negate the benefits of any merger between Vodafone and Unitymedia.

European regulators are not the only barrier, either. Consolidation between cable operators in Germany is bound to ring alarm bells for local authorities worried about cable dominance. Until the early 1990s, Germany had a national cable network owned by Deutsche Telekom, but that was sold off and dissected in a bid to weaken the telecom incumbent.

"History makes this deal unacceptable," a nostalgic Höttges told reporters at Mobile World Congress. "We [previously] sold cable infrastructure and had to put it in three pieces because antitrust authorities didn't want cable dominance. If Liberty and Vodafone come together, they will create a monopoly in the cable market."

As the Financial Times reports, Höttges is particularly worried because existing legislation forces housing associations to pay for cable installations in homes. These associations seem unlikely to fork out separately for broadband lines, preventing Deutsche Telekom from accessing as many as 11 million properties. The situation could help a combined Vodafone and Unitymedia to become a dominant force in the broadband and pay-TV markets.

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On the commercial front, too, there is no guarantee that Vodafone and Liberty will be able to resolve the differences that scuppered merger plans in 2015. "Liberty Global is comfortable with much higher debt and Vodafone is known for making dividend payments," says CCS. "Any deal between both companies would be extremely complex."

Cable cowboy John Malone, the chairman and majority owner of Liberty Global, is reported to have said that trying to resolve these differences is like trying to extract a large banana from a jar. The analogy makes one ponder what Malone gets up to with items of fruit, but does capture the awkwardness of the situation.

Even if it were just about assets in smaller eastern European markets, some kind of deal would hold attractions for both companies. Without both fixed and mobile networks, and a TV proposition to boot, service providers could look dangerously exposed in future. But without Germany, that deal would leave Vodafone in a less-than-ideal position in its biggest market, and uncomfortably reliant on Deutsche Telekom for wholesale fixed-line services. With the future rollout of 5G, a next-generation mobile technology that needs fixed lines for "backhaul" connectivity, that wholesale relationship could become even more strained. (See Europe's Backhaul Black Hole Looms Above 5G.)

— 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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