After a preliminary acquisition offer last week, according to
Vodafone Group Plc.
) has raised its bid to €7.5 billion from €7.2 billion
(approximately $9.6 billion) for Kabel Deutschland. This brings
the new offer to around 85 euro cents per share from the previous
bid of €0.80-€0.82.
We believe that Vodafone's new offer is a strategic counter
reaction to the proposed plan of
Liberty Global Inc.
) to acquire Kabel Deutschland. Recently, Liberty Global made a
higher offer to Kabel Deutschland, outbidding Vodafone's initial
Kabel Deutschland, with a net worth of €8 billion, covers over 8
million German households. It offers wireline services like HD
and analog TV, Pay TV and broadband Internet with speeds of up to
100 Mbps and fixed-line voice services through cable as well as
wireless services through industry collaborations.
It is evident that the prospective acquisition would oust major
players in the German wireline industry. Vodafone would then be
an undisputed leader in wireline business with the biggest loaf
of cable TV and broadband business in Deutscheland.
West Europe is experiencing a growing demand for pay-TV services
together with triple-play bundled services that combine basic
cable TV, and Internet. Telephone carriers like Vodafone are
increasingly looking for markets, where they can increase share
with bundled video, broadband, and telephone that warrant higher
margin and lower churn rates.
But, beyond this, Vodafone foresees significant cost synergies
(approximately 300-500 million Euros) by not having to pay
rentals for copper lines to Deutsche Telekom. Vodafone currently
requires these copper lines to provide its 3.3 million customers
in Germany with DSL services.
Further, Vodafone's efforts to bring its customers within one
network infrastructure (DSL to LTE) through the deal would result
in additional savings for the company by curtailing spending on
network build outs.
However, we believe that the implementation of network conversion
remains a long-term process and involves structural changes.
Hence, in the near future, we expect the likely Kabel Deutschland
deal, which comes with an existing set of network backhauls, to
provide a good platform for offloading data traffic and resolving
spectrum issues for Vodafone.
However, the biggest challenge for the company will be to win
antitrust approval. Historically, this issue has impeded
the successful completion of many deals such as the
) and T-mobile acquisition. Given the size of Vodafone's
prospective deal and its impact on the competitive position of
players like Liberty Global, there lies a fair chance of
Vodafone, which operates in the European market with the likes of
) currently carriers a Zacks Rank #3 (Hold).
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