As we have said all along, Vodafone only had to get the board of Kabel Deutschland onside and it was always going to win a one sided bidding battle for the Germany cable company’s hand, largely due to the automatic anti-trust land mines built into the bid from rival Liberty Global. Already there are potential hurdles that the German Cartel office could put in front of the Vodafone deal too, partly for the concentration of German broadband into fewer hands, and partly over the control this gives it in a Quad play, which might in turn affect the mobile market balance. At Faultline we believe that the deal will pass muster even at the over-fussy Bundeskartellamt (Cartel Office), which has refused many cable deals in the past.
Vodafone this week said that it will launch a voluntary public tender for Kabel shares at €87 a share, but that includes funding of an already declared €2.50 dividend, so it amounts to €84.50 a share and a value of €7.7 billion after you take away around €3 billion of debt, and implies an enterprise value of €10.7 billion.
The Board and management team welcomed the offer and said immediately they would proffer their own shares ‘ not surprising since they are coming onboard as the new Vodafone TV specialists. The idea is to merge Kabel with Vodafone Germany to create a business with revenues of €11.5 billion, with 32.4 million mobile customers, 5 million broadband customers and 7.6 million TV customers. This pretty much proves that Vodafone had virtually no pay TV customers in Germany, since this is how many Kabel Deutschland had. Company executives have tried to imply that its pay TV offering was doing fine on its own, and was ‘revolutionary,’ but refused to give out hard numbers.
Vodafone simply highlighted cross selling as the logic behind the deal, when of course there is so much more. Vodafone did however justify the acquisition in terms of synergies in both costs and capex and said that this will amount to an annual saving of €300 million after four years, and equates to this 3.0 billion in net present value. Vodafone said further that there are significant revenue upsides too from cross selling and improved customer loyalty.
The existing Kabel Deutschland management will run all of the 5 million broadband lines, lumping in the DSL lines from Arcor, and potentially granting control over the recent VDSL wholesale deal Vodafone did with Deutsche Telekom. Vodafone said that it would be Free Cash Flow positive in the second year after completing the deal, and that costs of integration would be around €300 million.
One of the clinchers as far as Vodafone was concerned is the captive revenue that comes with Kabel Deutschland. Its network passes around 43% of German TV homes at 15.3 million, running across 13 of Germany’s 16 federal states. It has 7.6 million direct subscribers, and around 60% of these are on long term contracts through housing associations. When in these housing associations individual customers cannot switch TV supply, only a housing association itself can change the supplier of its signal and this rarely happens, although Deutsche Telekom has teamed up with Sky Deutschland last year to offer an alternative. Most housing associations make it illegal to put up satellite dishes outside an MDU dwelling so the only pay TV game in town in an MDU (Multi-dwelling Unit) is through the incumbent cable operator.
Vodafone says that Kabel Deutschland has delivered EBITDA growth of 8% over the last year, but still say that the network is still under penetrated with just 16% of homes taking broadband and 12% taking pay TV. This is not entirely true, what it means is that only 12% take the premium service, while all homes get the minimum basic TV service.
Vodafone talks about it having an established ‘market-by-market convergence strategy’ but really this is the first major move that gives this impression. It bought DSL fixed lines from Tele2 in Italy and Spain, way back in 2007. The only other major move was to build-out fiber broadband lines when in March this year it agreed to tie up with France Telecom’s Orange in Spain to build their own shared fiber plant, investing up to €1 billion between them to bring high-speed Internet service to six million more households across 50 major Spanish cities by September 2017.
Vodafone will waste no time taking the TV platform that Kabel Deutschland has to its existing few million DSL subscribers, but the key to this acquisition as we have always said, is to be able to use cable conduits for existing base station backhaul at cheaper rates than it is paying Deutsche Telecom and also for new small cell base stations as LTE rolls out, as well as converting home broadband customers into WiFi Homespots, with one private and one public SSID, so that passersby can use them as hotspots. This is turn can be used for WiFi offload for the entire Vodafone cellular customer base.
Vodafone said that it intends to migrate its existing fixed line DSL customer base to Kabel Deutschland’s cable network where possible, which will make savings in closing down DSL central offices, and cut maintenance costs. It will also mean not paying Deutsche Telekom local loop fees. Vodafone has only just signed a new bitstream broadband deal a few weeks ago with Deutsche Telekom, but now it will use this to reach the part of Germany that is outside the Kabel Deutschland’s footprint, possibly taking the Kabel Deutschland pay TV service over this route, and making it possible for it to compete with the other major bidder in the race to buy Kabel Deutschland ‘ Liberty Global’s Unity Media cable operation.
Vodafone will continue to offer DSL broadband where the Kabel Deutschland network doesn’t reach, both with its unbundled lines and through the new bitstream agreement. Vodafone added that there is also scope for savings by combining overlapping regional and national fiber backbones.
Another key area for upside for Vodafone is to come up with Quad play options for Kabel Deutschland households, adding discount incentives to take mobile from Vodafone in these homes, where they don’t already. However the complete absence of any kind of multiscreen strategy at the rather backward Kabel Deutschland will have to be addressed rapidly if Vodafone wants to offer complimentary video services across its portable and cellular devices. When we last spoke to Kable Deutschland it was hoping to introduce conventional VoD and had no plans for a multiscreen strategy for a while.
Vodafone will pay for the deal with its existing cash resources plus some already available bank facilities and it says that its net debt to EBITDA ratio will increase from 2.0x to 2.4x. No big deal there.
We think that as the team learns more about Quad play economics, the Kabel Deutschland team will be called upon to help Vodafone move more deeply into pay TV around the globe. Now that really is a convergence strategy.