The Netherlands authorities are never going to allow Liberty Global to buy rival cableco Ziggo, in the process tying up around 72% of the Dutch pay TV market by number of homes, and way more than that by revenues. Ziggo is known to have the highest ARPU of any of the Netherlands pay TV players. Rivals such as Canal Digitaal, the satellite TV operation owned by M7, are thought to have far lower ARPU, as does KPN with its IPTV service ‘ so the combined entity might have as much as an 80% market share by revenue.
The share of pay TV in Netherlands would fall to around 64% if you include the 900,000 pay DTT homes which take Digitenne, although this has an ARPU of around €9, about 25% of that of Ziggo, so whatever way you look at this deal, it creates a top heavy monopoly. The two companies represent 97% of the cable industry, with them expected to mop up the remaining leading lights CAIW and Delta KabelComfort and other minnows over the next few years and take 100% between them
Ziggo knows that, and Liberty Global knows that, so what are these two companies really about? Do they actually think they can make a case to the Netherlands Competition Authority that a unified cable company is required to put up competition to KPN? There are numerous precedents in that the UK and France each have a single dominant cable entity ‘ but in the UK the pay TV leader is a satellite company in the form of BSkyB, and in France there are four viable IPTV players and the dominant CanalSat with 11 million homes on its books ‘ in other words pay TV remains balanced in those countries. The other territory where a single large cable operator exists is Spain, but this is also like the situation in the UK and France, in that not only is Ono a single large cableco, which makes up less than 25% of pay TV in the country, but it has under 1 million customers while a further 400,000 or so are seeded across a handful of smaller players, so a roll-up could happen into a second cable rival there.
In Germany where the competition authorities have frowned on a merger between Kabel Deutschland (KDG) and its once Deutsche Telekom owned siblings, but has presumably been happy to split cable down the middle between Liberty Global and KDG, primarily because satellite is nowhere near as dominant there, with just 2.4 million homes and Deutsche’s IPTV T-Entertain efforts are only just passing the 1 million mark.
Cable in Germany is closer to the shape of the Netherlands business with one important difference, TV ARPU is generally far lower and the best paying German customers are with satellite at Sky Deutschland. In Germany pay TV is made up of 19.8 million cable homes out of 23 million pay TV homes, an 84% market share, and there are now 6.8 million of these held by Liberty Global and 8.5 million by KDG ‘ with the only other major being Orion Cable with just over 3 million. Then there are around 1,000 small to tiny cablecos, many of them mere apartment blocks, reaching a further 1.2 million or so homes. Other forms of pay TV are as yet tiny, collectively taking up 16% of the market by homes and in this way it is a close match for the Netherlands. So if competition authorities couldn’t let a merger happen there, they can’t in the Netherlands.
Ziggo has so far only said that it will go public, in much the same way as Kabel BW said it was going public in Germany a few weeks back, but in the end gave in to a hugely overpriced bid from Liberty Global.
Ziggo is a different kettle of fish from Kabel BW, it is dominant, where Kabel BW was fairly small, and its network is 66% digital already and it is converting more from analog at a rate of around 16% to 17% of its network a year, which means that in two years it will have a 100% digital network.
Ziggo offers triple play and is rapidly moving towards a Quadruple play, either through an MVNO or through the use of spectrum it successfully bought WITH Liberty Global a year ago, some 40 MHz of cellular 2.6 GHz spectrum, which the two said would be put to work inside two years.
So this becomes a competition matter both on TV services and on broadband, bringing the number 2 and 3 broadband players in the Netherlands, with KPN leading and Tele2 bringing up the rear in fourth place in broadband, but with no TV offering in the country.
In one respect Liberty Global sees the potential of Ziggo going public as a threat to this joint venture on their spectrum purchase and actually only wants Ziggo to remain private, doesn’t want to take it over. If Liberty offers more than Ziggo shareholders can get by going public and then later gets the deal crushed by the anti-trust authorities, then it perhaps will get exactly what it wants. A direct appeal to shareholders will make it impossible for Ziggo to go public while a Liberty Global offer remains in play.
While it is still possible that anti-trust authorities may actually see the merged entity as the only way to provide end to end rivalry against the power of incumbent telco KPN, the cellular players such as Vodafone and T-Mobile are also going to find themselves in the firing line if that spectrum ever gets built out. The best way for Liberty and Ziggo to do that is partner one of them, either T-Mobile or Vodafone, putting the other one at a huge disadvantage, simply because after it is done a single cellular service would be up against two separate Quad play players, KPN and this merged cableco under Liberty Global.
Ziggo was formed at the beginning of 2008 by the merging of existing cable companies Casema, @home, Essent Kabelcom and Multikabel, initially into an entity called Zesko, which subsequently changed its name to Ziggo, and initially these companies merged under private equity control, to fend off the power of Liberty Global’s UPC, but also of KPN, given that the cable operators don’t compete directly because they operate in different territories.
The news of the Liberty Global bid for Ziggo broke through Reuters and the London Financial Times on Friday, with a value placed on the deal of €7 billion. Funding such a deal could also prove to be a sticking point, even for Liberty Global, and it may have to borrow heavily to structure a deal, since the private equity owners of Ziggo would want to exit the deal almost entirely and would at best accept 50% of the price in Liberty Shares. Prior to the Kabel BW deal Liberty had $5 billion in cash and equivalents which is only €3.5 billion and it has pledged over €3.1 billion of that to the Kabel BW deal, leaving precious little in the kitty. So it would have to reach for debt, and major banks would have to fund it and many of these have come a cropper over the past decade by lending money to cable companies and anyway Liberty Global already has $22.5 billion (€15.8 billion) of debt. Of course there is a rumor (there are always Liberty Global rumors) that it is selling off its Romanian subsidiary , but any income from such a deal would be tiny compared to the cost of Ziggo. The other possibility is that UPC can do one out of the two deals, it can either complete the Kabel BW deal OR make a bid for Ziggo, but not both.
But to Faultline this is a deal too far and the main, fairly transparent purpose of the deal is to kill off the IPO of Ziggo, and keep it for a time when Liberty Global does have the cash, and can really make a genuine run at it.
The Dutch anti-trust authorities are not well known for interfering with deals of this type and have never done much more than smack the knuckles of high technology companies and has endorsed moves to consolidate the broadband market. While the culture is libertarian and pro the individual when it comes to issues like piracy, it echoes the non-interference culture of the US when it comes to big business. However the European Commission would have already been on the phone to its counterparts in the Netherlands to say that it would almost be sure to intervene if the local regulator did not.
The creation of a single rival to KPN would mean that both would need to be treated equally, so things like unbundled access to the local loop, which is a common practice around European telcos, would have to be introduced to KPNs rival, and we believe that Liberty Global would baulk at such a move coming as part of the terms of a merger.