Vodafone-Liberty Global deal: what you need to know
Confidence has grown that Vodafone will get the all-clear to complete its acquisition of Liberty Global’s European assets later this year. We have a look at the deal and whether regulators will grant their approval.
Vodafone has agreed a deal with Telefonica in Germany to ease competition fears over its takeover of large parts of Liberty Global in Europe. Vodafone said it has agreed to sell access to its cable broadband network in Germany to Telefonica. The deal is thought to be part of a remedy package discussed with the European Commission (EC).
If it gives the green light, then the EC could spark a wave of consolidation in the European telecoms industry, which has been prevented from completing large-scale takeovers in the past.
We have a look at the deal, the competition concerns and what could happen next.
Vodafone to buy Liberty Global’s European assets for €18.4 billion
Vodafone announced it had struck a deal to buy Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania in May 2018 for an enterprise value of €18.4 billion, comprised of €10.8 billion in cash and the acquisition of €7.6 billion worth of the US firm’s debt.
Vodafone is funding the deal using existing cash, new debt and by issuing mandatory convertible bonds. The company has said it will remain within its long-term net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio range of 2.5–3.0x after the purchase, albeit it at the upper end. Importantly, Vodafone reserves the right to repurchase the shares issued as a result of the bonds (when they mature), meaning existing shareholders shouldn’t see their stakes diluted as a result of the deal.
The deal, if completed, will be Vodafone’s biggest acquisition since it bought Mannesmann in Germany for a record £112 billion in 2000.
Why is Vodafone buying Liberty Global’s European assets?
The primary reason Vodafone wants to purchase the assets is to drive its ‘convergence’ strategy, whereby it sells multiple services to customers – in this case mobile, broadband and television. This same strategy is being pursued by peers such as BT Group in the hope that bundled services can attract more customers and make them stickier.
For example, Vodafone only currently provides mobile services in Hungary, Romania and the Czech Republic but purchasing Liberty Global’s assets will allow it to also offer TV and broadband services. The assets in Germany, regarded as the main prize, will let Vodafone bundle the three services together to better compete with Deutsche Telekom, Europe’s largest telecom provider by revenue. In fact, if Vodafone completes the purchase then it will become the largest provider of high-speed broadband and cable services in Europe.
The assets being bought in Central and Eastern Europe currently provide services to 2.4 million customers and will make Vodafone the largest cable operator in the Czech Republic and Hungary, and the second biggest in Romania. Plus, while Vodafone will cement itself as a leader in these markets it also establishes a great growth platform for the company to feed on: broadband is only currently available to about 28% of homes in the three countries. Once it adds its new European customers to its existing base (including in Germany) then Vodafone will have 54 million customers on its books, but its network will reach 110 million homes – meaning it will already have the infrastructure and ability to more than double its customer base in the bloc post-completion.
What are the financial benefits of the deal?
Vodafone believes it can deliver substantial cost-saving and revenue synergies through the deal while staying within its existing financial framework and maintaining its progressive dividend policy. The company has said it expects the new assets to contribute additional free cashflow 'over time', stating it will be accretive from the first full year post-completion and 'double-digit' accretive from the third year to help support dividend growth.
Vodafone anticipates the deal will deliver cost and capital expenditure synergies of €535 million per year, excluding the cost of integrating the assets, and says the deal has a net present value of over €6 billion post-integration. Vodafone has said the cost-saving estimates are 'similar' to those generated by the successful integrations of Kabel Deutschland in Germany and ONO in Spain, where money was primarily saved through sharing networks, billing systems, procurement and unifying overlapping functions. It expects a further €1.5 billion per year in revenue synergies from cross-selling services across the two customer bases. As the assets will bolster its fixed line and TV services, Vodafone has said it expects to generate 35% of its revenue from these services once the deal is completed, up from about 29% at present.
Will the Vodafone-Liberty Global deal get past European regulators?
European regulators launched an in-depth investigation into the deal last December to analyse whether it could reduce competition and lead to higher prices and less choice for consumers. The initial focus was on concerns that the deal could lessen competition in the Czech Republic and a string of potential knock-on effects in Germany, including the impact of losing one of the top three telecoms companies in the country, the industry’s ability to roll-out next generation networks and technology like 5G, and its bargaining power with broadcasters and smaller providers it may supply under wholesale arrangements.
However, Vodafone and other parties have reportedly been sent a list of objections by the EC which has allayed fears the deal could be blocked. The Financial Times reported none of the areas of concerns are regarded as a 'deal breaker', and that regulators are no longer concerned with the potential impact in the Central and Eastern European markets with attention now solely on Germany.
German rivals object Vodafone’s expansionary acquisition plans
The FT and other outlets including Bloomberg and Reuters have suggested regulators primary concerns surround whether Vodafone will gain an unfair advantage in Germany at the cost of consumers.
Protests against the deal have emanated mostly from Germany, where the incumbent Deutsche Telekom and others including Telefonica Deutschland and smaller TV broadcasters have all publicly called for the deal to be blocked. German antitrust officials even requested European regulators refer the case back to them because of the potential impact on the country’s telecoms market, but have been unsuccessful so far. Liberty Global has said this is appropriate because it allows the effects of the deal to be measured on a Europe-wide basis and not hamstrung by any concerns in one country.
Vodafone is already the largest cable operator in Germany and has been for since it acquired Kabel Deutschland five years ago and Unitymedia, Liberty’s German arm that it hopes to buy, is the second largest. Importantly, there is not a single German state where both Unitymedia and Vodafone compete, which means they do not directly overlap one another.
However, Vodafone does operate in some jurisdictions where Unitymedia does provide cable services using Deutsche Telekom’s network. This is why Deutsche Telekom, and regulators, are worried as many expect Unitymedia’s arrangement with Deutsche to end once Vodafone takes over. While Vodafone and Unitymedia do not overlap in Germany, it does give Vodafone an edge over Deutsche Telekom. Reports suggest the main hurdle that Vodafone has been trying to clear with regulators is convincing them that neither Unitymedia or itself intend to build new cable networks in one another’s territories.
Vodafone and Liberty Global are adamant that Germany has nothing to fear from the deal and have put forward a strong argument that it is in favour of the country’s technological and economical ambitions.
'Even together, Liberty Global and Vodafone, whose cable networks don't compete or overlap, will be half the size of the incumbent operator. It's time to alter market dynamics by unleashing greater investment and competition,' said the chief executive of Liberty Global, Mike Fries, last year.
Germany is pushing for 25 million homes to have access to ‘gigabit connections’ (the next generation of broadband internet service which is typically delivered over fiber optic lines and provides speeds of 1000Mbps) by 2022, representing about 62% of all homes in the country. This is why Vodafone and Liberty have been boasting that they do not overlap one another in Germany, meaning the enlarged Vodafone will have the national coverage it needs to deliver the German government’s ambitions. Vodafone has said the deal will provide a 'strong second national provider of digital infrastructure in the German market, with the scale to invest in upgrading around 25 million cable households to gigabit-speed connections in just four years.' Vodafone boldly claims it can deliver two-thirds of all the gigabit connections the government hopes to have in place by 2028, and says it can do this three years earlier (in 2025) than the government’s current plan.
It seems German opinion of the deal is somewhat torn between the possible benefits and drawbacks. A larger Vodafone will undoubtedly provide a better and more capable rival for the incumbent, but that will mean having a fewer number of companies able to deliver the country’s technological goals and risks concentrating power under a fewer number of operators. It would also be foolish to ignore the fact that the German government owns nearly 15% of Deutsche Telekom while the state-owned bank KfW Bankengruppe owns another 17%.
What next for the Vodafone-Liberty Global deal?
The recent reports that European regulators have eased their concerns on the deal have been supported by the response from Vodafone, which said it still expects to secure final approval by the middle of 2019 as originally anticipated. The firm has confirmed discussions with regulators is ongoing.
The EU currently has a provisional deadline to decide whether to approve the deal by June 3, 2019, but it is important to stress that anything is far from certain. That deadline can be extended and there is still a chance Vodafone will have to make an offer to sell off part of its business or change its behaviour to get the deal over the line, which could fundamentally change the attractiveness of the deal. If the deal doesn’t complete for whatever reason, then Vodafone will pay Liberty Global a €250 million break fee.
But recent media reports and Vodafone’s reaffirmation that it expects to complete the deal on time has given investors reason to feel bullish. Some have also taken comfort from the fact the EC cleared Deutsche Telekom’s acquisition of Tele2’s Dutch business despite having identified potential concerns early in the process. It seems the scales are starting to tip in favour of Vodafone’s ambitions and consolidation of Europe’s telecoms industry, but there are still of multitude of reasons why the deal could falter at the final hurdle.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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