Vodafone Group Plc (VOD) approached Kabel Deutschland Holding AG to discuss acquiring the German cable operator, a target worth at least $9.5 billion that would help the wireless carrier expand in the broadband and TV market.
Vodafone’s informal offer values Kabel Deutschland at between 81 euros and 82 euros a share, said people familiar with the matter. Kabel Deutschland shares jumped as much as 11 percent to 83.05 euros after Vodafone, confirmed the “preliminary” approach in a statement today.
Vodafone contacted Kabel Deutschland to discuss an offer in the past week, Bloomberg News reported yesterday, citing people with knowledge of the matter. By moving in on Germany’s biggest cable provider, with 8.5 million connected households, Vodafone would add fast fixed-line services to its mobile offerings and prevent the asset from being purchased by John Malone’s Liberty Global Inc., which is also interested.
“If Vodafone doesn’t act now then Liberty will be there,” said Andrew Hogley, an analyst at Espirito Santo Investment Bank in London. “It’s become clear that triple-play operators can win market share in mobile very quickly.”
Kabel Deutschland advanced as high as 83.05 euros and traded at 80.93 euros at 5:21 p.m. in Frankfurt, valuing the company at 7.2 billion euros ($9.6 billion). Vodafone fell 0.2 percent to 184.65 pence in London. Kabel Deutschland shares have risen 27 percent since Vodafone’s interest first surfaced four months ago.
The two haven’t begun talks because Kabel Deutschland determined that the price Vodafone indicated it was willing to pay was too low, said the people familiar with the matter, who asked not to be named because they weren’t authorized to speak publicly. Discussions with the company could start as soon as Vodafone comes back with a higher price, the people said.
There is no certainty that an offer will ultimately be made, Vodafone said today. Munich, Germany-based Kabel Deutschland confirmed an approach by Vodafone in a statement. Spokeswoman Insa Calsow declined to comment beyond the release.
Telecommunications companies have commanded a 27 percent takeover premium in the past 12 months, according to data compiled by Bloomberg based on the average of 27 acquisitions valued at more than $1 billion. Softbank Corp. (9984)’s pending deal for Sprint Nextel Corp. (S) would be the largest this year. The Japanese company’s latest offer for Sprint is $21.6 billion for a 78 percent stake.
The telecommunications industry has been involved in $83.8 billion in transactions this year, according to data from 244 deals compiled by Bloomberg. It’s followed by the real-estate industry, which has accounted for $64.1 billion spent.
Vodafone, based in Newbury, England, has said it would be willing to take a hit to its credit rating for the right deal. In a meeting with analysts in March, Chief Financial Officer Andy Halford said he’d accept a BBB+ rating, one step below its A- ranking by Standard & Poor’s, should the opportunity for an acquisition arise.
The amount of additional debt required to push the company’s credit rating down a level is approximately the value of Kabel Deutschland, Robin Bienenstock, a Sanford C. Bernstein analyst, has estimated.
The willingness to take on debt indicates that Vodafone wouldn’t have to sell its 45 percent stake in U.S. mobile company Verizon Wireless in order to finance expansion, analysts have said. Its partner, Verizon Communications Inc., wants to resolve the partnership this year to win full control over the biggest U.S. wireless provider. Verizon has told analysts it would be willing to pay $100 billion for the stake, people familiar with the matter have said.
Vodafone Chief Executive Officer Vittorio Colao is pursuing deals across Europe to offer customers more services, increasing monthly bills and subscriber loyalty as revenue from mobile phones declines. Revenue for the fiscal year ending in March fell 4.2 percent to 44.4 billion pounds ($70 billion) as Colao cut jobs and expenses on the continent to support profit.
“Wireless services in Europe are under tremendous pressure,” Chetan Sharma, an independent wireless analyst in Issaquah, Washington, said in a telephone interview. “They need to offer quad play to keep their customers for a longer period of time. As you start to bundle, you typically see the lifetime value of a customer increase by 50 percent. It’s harder for the customer to leave.”
The company is also facing a threat of Liberty Global increasing its footprint in Europe. The Englewood, Colorado-based company completed its $24 billion purchase of Virgin Media Inc. last week, allowing the cable operator to expand in the U.K. Liberty Global is considering a takeover bid for Kabel Deutschland, people familiar with the matter said in April.
Marcus Smith, a spokesman for Liberty Global, declined to comment.
Vodafone last month signed a deal with Deutsche Telekom AG (DTE) to purchase access to the German carrier’s Internet lines across the country. Deutsche Telekom plans to supply 24 million households with speeds up to 100 megabits by 2016, a velocity already offered by the cable companies in many areas.
Kabel Deutschland doesn’t serve heavily populated areas in western Germany, in which Liberty Global’s Unitymedia KabelBW dominates. The operator’s attempt to buy smaller peer Tele Columbus Group was foiled by regulators in February.
Vodafone’s approach to Kabel Deutschland “raises the question what it will do in other parts of Europe,” Hogley said. The company may also make an approach to Spanish broadband provider Grupo Corporativo ONO SA or take a look at the Dutch market after missing out on Virgin Media in the U.K., he said.
Simon Gordon, a spokesman for Vodafone, declined to comment on the potential for another deal. Colao has said in the past that he will consider a number of options, including partnerships like the one struck with Deutsche Telekom, as he expands services in Europe.
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