It is very hard to add much to the words that we have already written about the prospect of Vodafone buying Kabel Deutschland Group (KDG) the leading German cable company. Vodafone has been after them since 2008, just after it was obvious that the price would be depressed, because the Federal Cartel Office (Bundeskartellamt) had prevented cable groups in Germany from merging.
This week in a terse, one line note, Vodafone acknowledged that it had made a preliminary approach to KDG, issued more to stem the rising tide of speculation than to provide any guidance. The share price of KDG went up around 8% on the Vodafone public announcement and KDG replied with one of its own.
The statement said that Vodafone has made a preliminary approach to KDG regarding a possible offer for the company and ends pointing out that there is no certainty that any offer will ultimately be made nor as to the terms on which any such offer might be made.
We know that Vodafone is good for the money, but right now it has roughly €9 billion in the bank in free cash, and threw off some €15.6 in cash last year, minus capex spending, which was roughly half of that.
Today Vodafone will have to trump the €7 billion market capitalization that the company has and will probably have to pay close to €8 billion to complete such a deal. Back in 2008 the price would have been closer to €3 billion, and when the company went public in March 2010, Vodafone could have picked it off for around its IPO price, so around €3.7 billion
At the time Vodafone was looking for a fixed line partner to bolster its Arcor DSL based broadband subsidiary, acquired in 2000 as part of the Mannesmann acquisition which had established the operator’s ‘swashbuckling’ reputation for doing major acquisitions. Several CEOs later that reputation is in tatters, and blue chip investors virtually run Vodafone at arms-length, picking the CEO who best reflects their conservative intentions. Vodafone may even face a certain amount of investor rebellion at spending even this amount of money.
At an intuitive level the fixed line triple play business of KDG does not fit that of Vodafone, but given the importance of the Germany market in its figures, it is the largest single business that Vodafone has in the world, bringing in €9.2 billion of revenue and its largest profit out of its €52 billion global revenue (usually expressed as British pounds at £44.4 billion but we’re doing this article in Euros due to its German focus).
In our assessment in last week’s issue, when Liberty Global was still talking about buying KDG we said, that we didn’t think that the Kabel Deutschland deal with Vodafone was ever off. We argued that Vodafone needs WiFi for cellular offload and fixed lines for backhaul right the way across Europe. And also asked why Vodafone would not also buy British Telecom as well? These deals may well be dependent upon it getting the $100 billion on offer from Verizon for the Vodafone 45% shareholding in Verizon Wireless, but it still makes operational sense.
Cellular operators going forwards cannot afford to be caught with no fixed lines in the ground and those two moves would save Vodafone blushes way into the future, while creating acceptable duopolies around the main European countries.
A few weeks ago Vodafone signed a deal to take bitstream broadband from Deutsche Telekom, which means that it now has access to very rapid DSL routes to market at 50 Mbps now, rising to 100 Mbps later.
Bitstream broadband is far closer to wholesale than to unbundled loops, and operators are pushing it in Europe in order to get all the benefits of Vectoring. Vectoring relies on cancelling cross talk in a telco wire bundle and if the lines don’t all belong to one telco, the cross talk is harder to cancel and can’t be done as well.
But despite the protestations of Vodafone executives, that deal was a catch up move, not a cure-all, and it is still way behind on its German video strategy, although it has what it describes as an advanced hybrid set top that it says is selling well. And yet it never gives out any numbers for its Germany TV service, and we suspect that the subscribers are virtually non-existent or free.
As we have said before we see a deal between Liberty Global and Vodafone, right the way across Europe with Vodafone is the ‘only MVNO game in town’ for Liberty Global to have a major cellular presence across Europe. It then becomes just as obvious that its LGI partner might be able to provide advice to Vodafone on how to run Kabel Deutschland.
The obsession with fixed lines right now is critical for Vodafone in order for it to develop a WiFi offload strategy. Most Telcos grew a home grown Cellco, right across Europe, and therefore the number one cellular operators in any given country can support their cellular company with a WiFi based offload strategy. But Vodafone has always been a purely cellular play and has just a few million DSL lines in each of Italy, Spain and Germany and works in partnership with British Telecom in its home country of the UK. These are the bastions of its European base and without WiFi offload, a 4G strategy here will have to rely on installing WiFi on the small cell base stations or through expensive partnerships. Acquisition is far cheaper and it’s instantaneous.
In the past the German Cartel regulator has prevented the main cable networks from having a single owner. The second and third largest are now owned by Liberty Global and if Vodafone takes KDG they will have between them about 15 million cable TV homes out of 19 million cable TV homes across Germany. We think it would be impossible for the regulator to find a better owner for KDG and doubt that it will provide any obstacles to prevent a deal with Vodafone. We also think that given its rise from a €3.7 billion valuation at IPO to almost double that today, the investors and management will be delighted with any price that is on or above today’s share price.
Vodafone’s TV ambitions in Germany began when it introduced an IPTV service in 2008, and in September 2009 closed it to launch the hybrid system which is in service today and which began taking customers in 2010. But as we say, this purchase is predicated not on simply a TV offering nor simply WiFi offload, but both of these plus small cell backhaul, which KDG is well placed to deliver for key parts of Germany and which Liberty Global is well placed to provide much of the rest, with that deal with Deutsche Telekom completing the picture.