Liberty Global has landed the prize German cable asset, Kabel Baden-W’rttembergs (Kabel BW), which everyone in Europe has been talking about since it went up for grabs late last year. Few rivals for Kabel BW’s hand could live with Liberty’s financial power, and although we think Liberty has paid an exceptionally high price, at over €3.1 billion, this deal could secure the company its long wished for leadership in the German Pay TV market.
However like so many of these deals, the opera is not over until the fat lady sings, and there are many hurdles to overcome, not least of which is the financial regulator’s approval in Germany.
For years the Bundeskartellamt, the German Cartel office, has said that Kabel Deutschland Group could not buy Kabel BW, one of four of the cable subsidiaries which Deutsche Telekom used to run. The other two made up Unity Media, a company acquired by Liberty Global a year or so earlier. This outcome will now make the German regulator smile, it has two strong rivals slugging it out in the cable sector in Germany, something it was always after, instead of one. KDG has almost 9 million German homes taking TV from it, while the new company will have the 4.6 million it acquired with Unity Media, and a further 2.3 million with this acquisition, a total of some 6.9 million. But it may have crippled its own public KDG operation by letting all the rich homes in Germany go to a rival.
While the merged Liberty operation may appear smaller in Germany than KDG by some way, the two units that Liberty hold throw off far more cash and need far less investment in their infrastructure ‘ for instance KDG has only just announced this week that it has a VoD offering ready – so the ownership is really one sided in the other direction, and Liberty can focus purely on growing customers, while KDG has to worry about the amount it pays for debt, and how to upgrade its infrastructure. Of course like most cable operations in Europe, if not the world, neither of these two companies compete head on for customers, since the cable build out allocations have always been offered on a regional basis with KDG reaching the largest areas in Germany but the other three based in the Baden-W’rttemberg, North Rhine-Westphalia and Hesse regions.
But while the German regulator may be licking his lips at this deal, happy at last that there are two owners in German cable, European regulators may start to baulk. Liberty Global already has almost 17 million connected homes in Europe, and this will take it to over 19 million, giving the company even more content and equipment buying scale, and making it dominant or second placed in a number of key, high yielding, markets. However Germany is not one such market, with KDG averaging under €10 a month per home. The Unity Media operation of Liberty is closing in on €15, and Kabel BW is thought to be higher still. In other markets such as its first major European stronghold in the Netherlands, Liberty has an ARPU of some €23 a month, while its rival Ziggo has one closer to €33.
What the local regulator will focus on is whether or not there are multiple routes to market for Germany originated content, and if there are multiple pay TV services available for purchase in each region. Germany has been very slow to see the emergence of satellite DTH (direct to home) TV as a force with only 2.4 million of Germany’s entire 23.5 million pay TV homes, so just 10%, being served by what has become Sky Deutschland (although there is a lot of free satellite TV there). Some 19.8 million are served mostly by the major cable companies, while IPTV serves just 1.3 million German homes, the bulk of which are Deutsche Telekom’s T-Entertain IPTV service.
So this is a change of ownership which represents 10% of pay TV homes in Germany, and putting it into a commercial unit which will own around 30%.
The bigger concerns will be throughout Europe rather than within Germany’s boundaries, and the European Commission might be the company that decides to block this merger, or more likely demand content concession, based on Liberty’s huge footprint in multiple territories.
The Sky brand name of News Corp is the only other company with this kind of reach in Europe with 10 million DTH homes in the UK, 2.4 million in Germany and almost 5 million in Italy, it controls entertainment in around 17.4 million European homes. Sky owns a lot of its own content, as well as contracting for one of the strongest movie channels in Europe and has been repetitively successful bidding for exclusive sporting live events, so the Liberty deal may well come at the cost of some behavioral promises in this area of content dominance from the European Commission.
The selling owner Swedish Private Equity firm EQT has insisted all along that it would get its price for this property and was ready to take it public rather than give the property away and made clear noises that this was its fall back plan after the first round of bids. It was only after Liberty went away and revised its bid that EQT accepted the deal, which is why it came as such a surprise when announced this week.
This was very much a calling of liberty’s bluff, since a likely public valuation would have been far lower, despite the claim that this only values Kabel BW at what it says are 8.1 times Liberty’s estimate of Kabel BW’s 2011 earnings before tax, depreciation and amortization. However Liberty made it clear that this was after taking into account savings that would come from integrating the property into its cost structure, which means when all overlap on overheads has been taken out. So the real multiple is likely to have been far more, hence our view that it was overvalued, and by some way.
Liberty currently has cash of $3.8 billion and what it calls total liquidity of over $5 billion, so it doesn’t have to go outside for any of the money to buy Kabel BW, and it doesn’t have to sell off any of its existing businesses to relieve financial pressure on the company. However there has been a rumor for some time that it plans to sell out to RCS & RDS in Romania where they each have over a million cable customers. Currently a price war in Romania, driven by the twin offerings of Romtelecom, now a subsidiary of Deutsche Telekom, in both Satellite and IPTV, and that price war perhaps makes Romania less attractive for Liberty and it seems ready to sell out and put the cash to work elsewhere in Europe.
The strength of Kabel BW is that it is based in one of the most prosperous regions in Europe with its network passing 3.7 million homes. Liberty’s Unity Media operation passes a further 8.7 million homes, giving it a potential reach of 12.4 million German homes, over a third of the 35 million plus TV households there.
Mike Fries, President and Chief Executive Officer of Liberty Global, said, ‘The proposed acquisition of KBW is great news for our shareholders and, just as importantly, German consumers. This transaction provides us with further access to one of the fastest-growing cable markets in Europe and is fully aligned with our strategy of acquiring world class cable operations that are accretive from a value and growth perspective.’
Liberty said that the deal is subject to regulatory approval and is expected to close in the second half of 2011. Out bet is that it will take quite a bit longer if the EU gets involved.