The leading German Financial newspaper Handelsblatt, has reported once again the failure of the entire German cable industry to coalesce into a single entity. A deal to merge Kabel Deutschland, Unity Media and Kabel Baden-Wuerttemberg, which has been rumored to be on the cards once again, is now likely to be off.
However all that has happened is that an official of the Bundeskartellamt, the German anti-trust authority, has said that it is ‘problematic.’
Our view is that this is almost entirely knee jerk by the regulator, and that eventually such a deal will be done, and will not only be in the eventual interests of the local German consumers, but almost certainly be the long term aim, and the sole possible escape, for all of the private equity groups that have been involved in German cable over the past five years.
Kabel Deutschland (KDG) remains the largest of these cable operators with around 9.6 million customers, and Unitymedia, a collection of three previous cable operators, Ish and Iesy and Tele Columbus with around 4.7 million. Kabel Baden-Wuerttemberg (Kabel-BW) has about 2.3 million customers bringing the total to around 15.6 million and all of them are in varying states of transitioning from analog to digital and enacting tripe play services with the addition of broadband lines and voice services. This block of cable would represent about 84% of Germany’s 18.45 million cable TV homes. But most of the various cable companies came out of regional licenses and do not compete with one another, so what’s the harm in them merging?
Instead they compete with satellite, which is growing, and according to SES Astra reached 16.2 million homes, while unlike most of Europe where it is much stronger, in Germany Digital Terrestrial (DVB-T) broadcasting reached just 2.75 million and IPTV around 270,000 homes, the rest of the 37.7 million households there, around 2 million, take only analog broadcast TV.
What’s particularly interesting is that cable is more or less stagnant in numbers while satellite grows and IPTV, although very small there, is just starting to take off in high numbers. So it is cable which needs both money for investment, consolidation to make it more efficient and to give it better content buying power, and to upgrade its systems to digital so that the suppliers can enjoy the benefits of triple play more widely.
The Bundeskartellamt is still thinking in terms of cable versus cable, and of the time when Deutsche Telekom dominated cable TV across the country. Clearly it doesn’t want a return to those times when it owned KDG, most of what is now Unity Media, as well (Kabel-BW). Now maybe the regulator knows something that we don’t and that the eventual plan is to sell these all off to Deutsche Telekom (something the European Commission would not allow anyway), but it seems to us that a combination of these companies is just the kind of shot in the arm that Germany telecommunications needs in order to create some competition there.
The rest of Europe has already realized this and in the UK, France, Spain and Sweden one cable operator owns over 70% of the market. It is also true that Deutsche Telekom has more than ten times the revenue of all the German cable operators combined, something which is more polarized in Germany than in most of Europe.
It looks to us that this is a merger deal that Europe would give its blessing to, but the Bundeskartellamt is doing its very best to never allow in front of the European Commission, so that it can protect its beloved Deutsche Telekom from any home based rivalry.
All of these cable operators are now owned by private equity groups of one kind or another, with KDG owned by Providence, Unitymedia shared between Apollo and BC Partners and Kabel-BW owned by Sweden’s EQT.
The job of any financial regulator is to keep markets safe from undue dominance, especially dominance created by a monopoly in another market, created by collaboration or created by subsidy from other businesses. By any sensible measure of competitiveness it is Deutsche Telekom that is the big danger to competition, and the regulator should be doing everything in its power to ensure this merger goes ahead. Obviously the private equity groups reasoned the same, and even the now conservative Vodafone, recently reported by German newspapers to be seeking to buy KDG, thought as much, and it is only the regulator that is behind the times.
A deal to merge these interests was last tried in 2004 and it was the same financial regulator which blocked it at the time. If this deal doesn’t gain its blessing this time around, there will be another attempt that will win it over we are sure, within the next few years.