Watching the private equity groups encircle and bid for cable TV operators in Europe is usually like watching Orangutans fight, there’s more noise than action. But there is clearly now firm action going on around Kabel Deutschland Group (KDG) and it is one that potentially threatens to change the fortunes of cable across Europe. KDG is the largest cable operator in Germany and has the potential to unify not just German cable groups, but potentially cable networks across Europe.
KDG is mostly owned by Providence Equity Partners which holds a definitive 88% stake, with Ontario Teachers’ Pension Plan and senior managers holding the rest.
The Wall Street Journal, along with local German papers, have all spoken to a number of private equity groups which all say they are bidding for KDG, but it is likely to be a drawn out and may potentially be an inconclusive affair.
This week Deutsch Telekom, KDG’s former owner, called for the cable operator to be regulated in an interview in Die Welt newspaper, and for it to be forced to allow other networks to connect to its infrastructure.
The CEO of Deutsch Telekom, like many CEOs of the company before, has absolutely no grasp of either how to stimulate real competition in the telecoms market or the principles of anti-trust. It has been a constant battle between the European Commission, the German regulator and the Deutsche Telekom management, to get DT to unbundle its lines, despite the fact that it is clearly dominant. Now CEO Ren’ Obermann thinks that KDG should open up its lines to DT. Unbundling is still being resisted in the trenches in Germany, with resistance in the form of impossibly high recharges for unbundled access to DT’s lines.
Back in September the Administrative Court in Cologne ordered recalculations of unbundling fees on historic Deutsche Telekom deals on DSL connection. At the same time Deutsche Telekom had already convinced the local regulator to allow it to increase (not decrease) fees for unbundling, up 23% in a single year.
If a clear cut monopoly is to be allowed to stave off unbundling by non-co-operation and price increases, then it’s hardly going to help matters if its rivals have to offer unbundled access.
Essentially it is all about lowering costs for DT in completing its public obligations to wire up most of Germany with high speed broadband, and in the past DT has offered to work with rivals on installing fiber. But the real reason for this statement is clearly about trying to scare off all the private equity groups, suggesting that they would be walking into a political minefield.
However their political astuteness is likely to be ahead of Obermann’s own, and they all seem to sniff a change in the air, whereby the anti-trust authorities will cease seeing the Cable market as a single market where there should not be a monopoly, and increasingly see it as providing viable competition to DT. If that was the new position in Germany, then KDG could be bought and sold on to Liberty Media, unifying the old DT cable holdings into one national footprint cable operator rather than regional players.
Liberty just bought Unity Media in Germany for €3.65 ($5 billion), itself the merger of two of the top five cable companies. Liberty has also sold its Japanese holdings so that it has $4 billion of extra cash on its balance sheet.
With a valuation for KDG of around €5 billion ($7 billion), that cash would pay for a little more than half of the deal, and the private equity groups would just take the company to hold it and sell it on, or more likely to sell on 50% of the company at first, with a later pay day based on performance.
In every private equity deal around Europe in cablecos, the buyer has taken the existing customer base, taken on some debt, against the assets, and revamped the cable architecture from analog to digital or from digital to DOCSIS 3.0, all the way up the technology ladder to catch up with the US cablecos. The asset is then sold on.
During any ownership of KDG there could be about a two or three year tidying up effort, by which time the route for an exit to Liberty Media should be cleared. Already there are dominant cable players in France and the UK, and the Netherlands, so why not have one big one in Germany.
According to reports BC Partners has made a joint bid with CVC Capital Partners, Advent International and Bain Capital have each submitted their own bids, and the Carlyle Group has yet to make its move.
The talking will now centre on who is the lead and who is going to come in on the back of the deal, and what kind of future exit route they can line up with either Liberty or by taking KDG (plus whatever else they buy) to the public markets. It could still end up in a simple IPO for KDG now, but the Private Equity groups will have their say first.
KDG has 9 million cable connected households in Germany, is the largest of the three major cable network providers there and the largest single cableco in Europe.
Other potential partners for the private equity players include Vodafone and Telefonica but neither have made any public statements and their appetite seems jaded right now.
Our own thoughts about this deal is that it will take a long time, that private equity will probably win out over the process of issuing an IPO, but that Liberty Global is more likely to go after the smaller Kabel Baden Wuerttemberg (BW) or Orion Cable, before it is ready to look at KDG.
Which would leave the private equity groups simply playing pass the parcel and waiting for an IPO as their only exit route.