Kabel Lures Vodafone as Malone Takes Eyes Off Germany

Kabel Deutschland Holding AG, whose stock has more than tripled since its debut three years ago, would give Vodafone Group Plc instant access to more cable households in Germany than the footprint Liberty Global Inc. spent the past decade trying to build up.

Vodafone is considering a bid for Germany’s top cable operator, with a market value of more than 6 billion euros ($8 billion), a person familiar with the matter said, asking not to be identified because the matter is private. A deal would be the second major purchase of a cable provider this year, after Liberty Global agreed to buy the U.K.’s Virgin Media Inc. for $16 billion.

Inheriting assets that previously belonged to Germany’s former phone monopoly Deutsche Telekom AG, Kabel Deutschland would give a new owner 8.5 million paying households, topping Liberty Global’s 7 million, and potential customers for combined fixed-lines, mobile and TV subscriptions in Europe’s biggest telecommunications market.

Vodafone is responding to “the threat of cable becoming a disruptive player in the mobile market,” said Matthew Bloxham, an analyst at Deutsche Bank AG in London. “A cable asset enhances their product line-up for the area that Kabel Deutschland covers, which is about a third of German homes that they can deliver full triple-play to.”

Vodafone fell 0.7 percent to 170.50 pence at 8:05 a.m. in London and Kabel Deutschland declined 0.6 percent to 68.77 euros in Frankfurt.

Rental Fees

If the deal is approved by competition watchdogs, Newbury, England-based Vodafone could also avoid paying rental fees on copper lines to Deutsche Telekom, according to Andrew Hogley, a London-based analyst at Espirito Santo Investment Bank.

Germany’s cable TV grid was first deployed in 1982 by the country’s Federal Post Office, which was later privatized and split up into what became Deutsche Post AG, Deutsche Postbank AG and Deutsche Telekom. Prompted by the European Union competition authority, the latter broke up the network and sold its components.

Over the last 10 years, Germany’s cable companies have added Internet and phone services and began grabbing market share from Internet providers. Kabel Deutschland has also begun offering wireless services, further trespassing into the domain of traditional phone carriers.

A 5.5 billion-euro bid by John Malone’s Liberty Media Corp. for the assets which were to become Kabel Deutschland was rejected by regulators in 2002. A group including Goldman Sachs Group Inc., Apax Partners and Providence Equity Partners then acquired the business for less than half that amount.

Lower Spending

Kabel Deutschland, led by Chief Executive Officer Adrian von Hammerstein, has lagged behind many of its European peers in selling services that go beyond its basic TV product. Its average revenue per user was 15.7 euros in the quarter ended September 30, compared with 40.4 euros at Dutch cable provider Ziggo NV and the equivalent of 61.6 euros at Virgin Media, according to Bloomberg Industries.

Vodafone first made a bid for Kabel Deutschland three years ago, people familiar with the matter have said, and the company denied it at the time. BC Partners Ltd., CVC Capital Partners Ltd. and Bain Capital LLC also submitted offers, the people said. Kabel Deutschland eventually opted for an IPO.

The shares have tripled from the 22-euro IPO price and they jumped 8.8 percent yesterday to close at a record 69.17 euros. Liberty Global has more than doubled over the three-year period, while Vodafone gained 16 percent.

End Game

Liberty Global has meanwhile gathered other large cable assets in Germany to form Unitymedia KabelBW, the second-largest operator in the country. Its geographical areas have little overlap with Kabel Deutschland.

Liberty Global Chief Financial Officer Charles Bracken said in November that he expected German regulators to eventually approve future acquisitions of cable assets.

Vodafone’s plan crosses aspirations Malone may have had to win control of Kabel Deutschland after all.

“For Kabel Deutschland, they’ve always seen a combination with Unity and KabelBW as the end game,” Espirito Santo analyst Hogley said. Now, Vodafone is “trying to do it while Liberty Global is otherwise engaged.”

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