Vodafone Group Plc.
) is reportedly contemplating a buyout of Germany's largest cable
network company, Kabel Deutschland Holding AG. Although there is
no an official acknowledgment of this deal, it certainly brings
Vodafone in the league of M&As taking place in the global
Vodafone Group is the world's largest revenue generating
wireless communications operator and the second largest carrier
after China Mobile Limited , based on subscription. The
prospective multi-billion dollar acquisition would not only
foster its presence in the European telecommunication market, but
also consolidate its competitive position against equal potential
Liberty Global Inc.
Deutsche Telekom AG
) in Europe's largest telecommunication market.
Kabel Deutschland, with a net worth of €8 billion , covers 8
million German households. It offers wireline services like HD
and analog TV, Pay TV and broadband Internet with speed up to 100
Mbps and fixed-line voice services through cable as well as
wireless services through industry collaborations.
A possible takeover of this company would provide Vodafone an
access to the existing setup of Kabel Deutschland and solidify
its wireline business in the key European market. According to
business reports, in the fiscal year ending Mar 31, 2012, Kabel
Deutschland reported revenues of €1,700 million and an adjusted
EBITDA of €795 million, which hints the financial synergies
Vodafone can draw from the deal.
Competitive Landscape in German Wireline Biz
Similar to the other international markets, the German telecom
market is governed by highly competitive market forces.
Currently, there are three major companies - Kabel Deutschland,
Deutsche Telekom and Liberty Global Inc. - which are dominating
the fixed line segment.
These mega companies have been battling each other to
penetrate deeper into the domestic market through mergers and
acquisitions. Liberty Global Inc. remains ahead in this race with
its purchase of Germany's two leading cable providers -
Unitymedia and Kabel BW - in 2010 and 2011, respectively. In
2012, Kabel Deutschland proposed to buy regional service
provider, Tele Columbus. The buyout was however rejected by the
German regulators citing competitive issues.
According to Reuters, while Deutsche Telekom enjoys a hefty
position in the broadband market with 40% share, Liberty Global
and Kabel Deutschland together enjoy 13% market share and
continue to win customers through competitive offerings.
When the whole world is going wireless frenzy and seeking LTE
expansion plans, it might look like an out of the league strategy
for a wireless company to seek expansions in the fixed line
business involving significant investments. But, for Vodafone
this acquisition marks an important move besides improving its
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 a big loaf
of cable TV and broadband business in Deutsche land. But, beyond
this, Vodafone foresees significant cost synergies (approximately
€300-€500 million ) by not having to pay rentals for copper lines
to Deutsche Telekom. Vodafone needs these copper lines to provide
its 3.3 million customers in Germany with DSL services.
Further, Vodafone efforts to bring its customers within one
network infrastructure (DSL to LTE) through the deal would result
in additional saving for the company by curtailing spending on
network build outs. According to Vodafone's latest interim
financial results, the company has already covered about 53% of
its subscription under LTE coverage, out of which nearly 283,000
customers are through fixed line substitution.
However, we believe implementation of network conversion
remains a long term process and involves structural changes.
Hence, in the near future we expect the 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.
Prospects of the Deal
We believe there's many a slip twixt the cup and the lip
before the deal gets realized. The biggest challenge for the
company will be to win antitrust approval. Historically, this
very issue has stained the successful completion of many deals
) and T mobile acquisition. Given the size of Vodafone's
prospective deal and its impact on the competitive position of
other players, there lies fair chance of regulatory
Vodafone currently carries a Zacks Rank #3 (Hold).
DEUTSCHE TELEKM (DTEGY): Free Stock Analysis
LIBERTY GLBL-A (LBTYA): Free Stock Analysis
AT&T INC (T): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis
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