It is very tempting to leave the story about Vodafone and Liberty Global fighting over who will buy Kabel Deutschland Group (KDG) until the very last minute of Faultline’s publishing deadlines. That’s because it’s a fluid situation which changes by the minute.
As we write this, Vodafone has been reported by Bloomberg and others, as having raised its offer to match that of Liberty Global’s at €85 a share, valuing the company at €7.5 billion.
It is a rare thing when two bidders are genuinely fighting it out for ownership of a
target company, for one to bid the same price as another, but in this case there are reasons, because Liberty is in no position to actually complete a bid. In fact there may be legal ramifications for its involvement in the bidding process at all and if we were Vodafone, we might seriously consider threatening them ‘ a bit like Sprint has been posturing legally in that ‘other’ auction in the US, accusing Dish Network of tempting shareholders despite ‘unlawful corporate governance restrictions”
In Germany it is different. Liberty should know full-well that its bid cannot be completed, because the same collection of its own cable properties in Germany, Unity Media and Kabel BW, now trading simply as Unity Media, was prevented from merging with Kabel Deutschland on at least two occasions that we can remember. The Bundeskartellamt (Cartel Office) has consistently prevented the majority of the cable in Germany coming together into a single operation. If it was to allow it now, the previous bidders would be duty bound to sue the Bundeskartellamt.
There have been voices raised against this. Mike Fries, the CEO of Liberty Global wants to know why Deutsche Telekom is allowed to operate all over the country, when no cable company is so allowed? The Bundeskartellamt clearly does not want to create an artificial second placed company in fixed line broadband AND pay TV, and potentially also in second place in fixed voice ‘ allowing competition to become restricted in three separate, but related markets, in a single transaction.
That’s why it forced Deutsche Telekom to divest itself of all the major cable companies 11 years ago in the first place, that’s why it did not allow Liberty Global to buy ALL of them at that time in 2002, and why it would not private equity groups effect a merger, or allow the freshly public KDG buy the other two majors in 2009. Even as recently as a few months ago the Cartel Office would not sanction the purchase of the 2 million cable homes owned by fourth placed minnow, Tele Columbus by KDG.
We suspect that the outcome that the Cartel Office wants is for Unity Media to buy Tele Columbus, to create two major cable monoliths with over 8 million homes each, which between them can also create an MVNO to push competition not just in the fixed line space against the incumbent, but in the cellular space, and all that this entails.
Eventually, through the use of OTT services it perhaps hopes to have three equally placed fixed line pay TV operators plus Sky Germany, competing nicely to develop German pay TV for the consumer. Four OTT players would be a fine competitive position for Germany, which has suffered from monopoly for longer and in a more extreme way, than the rest of Europe in Telecoms.
But a regulator rarely gets what it wants, and bidding for KDG looks like it will come to a conclusion and all that Vodafone has to do is ‘match’ the bid by Liberty to win the prize. It realized this on Tuesday when the Liberty bid came in, and it peremptorily increased is bid from a reported $7.0 billion to $7.5 billion. Liberty ‘ your move.
If we were in senior legal positions at Vodafone, after the deal has gone through, we would go and ask Liberty Global for the $500 million difference it cost us, on a counter bid that Liberty knew to be untenable by the financial regular.
You MIGHT convince us that John Malone (chairman) and Mike Fries (CEO) of Liberty were so keen that they could not resist bidding, or that they planned to go to the courts to overthrow any adverse ruling by the regulator. You might, but if that was the case, why not put in a decent bid, not just a nuisance irritation bid, which theirs surely was.
A piece in the London Financial Times suggested that Liberty thinks it can get over regulatory issues and has been speaking to the regulator about this, by putting its own German assets into KDG in return for shares in the public company. It would be a convenient way to do the deal, given that right now Liberty has too much debt, by its own admission (due to when it bought Virgin in the UK) and not spending cash would suit its purposes well. The Vodafone deal will be straight cash, far more attractive to shareholders.
Our suspicious minds immediately picture some form of illegal collusion ‘ where the real concern here is that Vodafone too will be thought unworthy of buying KDG. We have talked about a closeness between Vodafone and Liberty in that they could easily become partners across Europe ‘ with the fixed lines, for the most part coming from Liberty and the cellular customers and know how coming from Vodafone, to go up against all the incumbents across the continent. Where Liberty cannot acquire the fixed lines, such as in this deal, it has Vodafone do it for it and vice-versa.
This low-ball bidding process could be carried out half-heartedly so that the regulator can see that without Vodafone the only options left for KDG are options it cannot consider sanctioning, and so that the shareholders can see that there was a healthy bidding war, so they can be sure they got a fair price. When we first talked about this deal we said that Vodafone could have bought KDG for €3.7 billion a few years ago, and it should have moved then, but that now it will have to pay close to €8 billion, and it is still some way off that.
But this is a long game of chess, where no more than a handful of operators across Europe will eventually end up with the broadband, cellular, fixed line and pay TV spoils. Liberty is the European number one in pay TV (and close to being it in fixed broadband) , Vodafone is top dog in cellular.
Right now this is also a cellular play, with Vodafone able to unseat the MVNO relationship at KDG, which was in favor of Telefonica, and could be switched to Vodafone at the first opportunity, if the deal goes through. That could be in the back of the mind of the Cartel Office, and it may be worried about the balance of power in cellular in Germany where Vodafone is a strong second place to T-Mobile and the third placed player E-plus has zero fixed lines and is owned by KPN in the Netherlands, and the fourth is O2, now owned by Telefonica. A balance of power needs to be retained here, as well as in fixed lines.
One of two things will happen, if Liberty is serious about winning KDG it will reply to the Vodafone bid, if it is not, the KDG Board will embrace the Vodafone bid and put it to the Cartel Office. We think that latter is more likely but it may well find a way to get the price up to €8 billion.
We have said before that the benefits for Vodafone have recently become obvious, citing use of the cable lines for cellular backhaul, the ability to remove an MVNO customer from O2, a strategy for future WiFi roaming using KDG Homespots, and cross marketing, all make it a deal it should do.
This fight between the two will almost certainly alight once again in the UK, where Liberty has bought Virgin and where Vodafone relies heavily on backhaul services for BT. We think a freshly rich Vodafone, post the $100 billion sale of its US operations, would love to buy BT, and if you imagine these two partnering around Europe, there are lots of other deals that you can see them doing.