Vodafone’s German Deal in Balance in Hedge-Fund Catch-22

Vodafone Group Plc’s 7.7 billion-euro ($10.2 billion) takeover of Kabel Deutschland Holding AG is under threat amid speculation that a hedge fund that boosted its stake in the target did so to squeeze extra cash from the deal.

The U.K. mobile-phone company needs to collect 75 percent of Kabel Deutschland shares by midnight tonight in Germany for the transaction to go through. The offer will lapse if Vodafone, which held or had the backing of owners of about 20 percent of shares by yesterday, doesn’t reach that threshold.

Increasing Vodafone’s risk of failure is Elliott Management Corp., the company run by billionaire Paul Singer that has recently become Kabel Deutschland’s biggest shareholder. The hedge fund may be betting it can squeeze more than the 87-euro-per-share offer price out of Vodafone, a person familiar with the takeover offer said, asking not to be named discussing private deliberations.

Elliott -- which said this week its stake in Kabel Deutschland has reached 10.9 percent -- wants to take advantage of a German law that often requires a buyer that gets at least 75 percent of the target’s shares to offer more money to hold-outs after securing a so-called domination and profit-transfer agreement, the person said.

German Play

The buyer often needs to compensate the remaining shareholders with a higher payment for gaining control of the target’s profits. Investors who haven’t sold their stock can also sue to get a higher price from the courts.

Kabel Deutschland rose 0.5 percent to close at 85.55 in Frankfurt. Vodafone added 1.1 percent to 210.15 pence in London. Vodafone’s 87-euro-per-share offer price includes a 2.50-euro dividend payment.

“Buyers of German listed companies are often willing to compromise on pay-out remuneration to remaining shareholders to avoid a drawn-out legal dispute,” Soenke Becker, a German M&A partner at Baker & McKenzie who isn’t involved in the transaction, said in a phone interview. “With 11 percent, an investor has significant weight to throw around since one can avoid any squeeze-out scenario and it could pay off well in the end.”

A spokesman for Elliott Management, asking not to be named citing company policy, declined to comment on speculation about its stake.

Catch 22

The hedge fund has tried this strategy in the past. Last year, Elliott and other shareholders in Germany’s Demag Cranes AG sued acquirer Terex Corp. for a higher payout after its $1.4 billion takeover offer, Reuters reported in October, citing people familiar with the case who it didn’t name.

The catch is Elliott needs 75 percent of investors to sell. Otherwise, the deal collapses and Vodafone can walk away.

Buyers of German companies can also squeeze out minority shareholders once they’ve acquired 90 percent or 95 percent. The remaining investors regularly force the buyer to pay a higher price than the original bid before selling their shares, resulting in a profit for the holdouts.

Vodafone agreed to buy Germany’s biggest cable company in June as part of its strategy to add fixed-line assets to its portfolio in Europe. The company is betting packages that combine phone, Internet and TV services will boost revenue and increase customer loyalty. Fixed assets also help carriers bulk up wireless networks by giving them more capacity to offload mobile traffic.

Vodafone’s Options

A lot has changed for Newbury, England-based Vodafone since it made the agreement with Kabel Deutschland. The company agreed to sell its 45 percent stake in U.S. mobile-phone company Verizon Wireless for $130 billion last week in the biggest M&A transaction in more than a decade.

While most of that is going back to its investors, Vodafone will have $20 billion to reduce debt and $10 billion to expand its network. The Verizon Wireless stake sale gives Vodafone options beyond Kabel Deutschland, two people familiar with the matter said.

One alternative may be buying Vodafone’s rival for Kabel Deutschland, Liberty Global Plc, one of the people said, asking not to be identified discussing internal deliberations.

Liberty Global, controlled by billionaire John Malone, had bid against Vodafone for Kabel Deutschland. Malone is also adding to his European network, buying the U.K.’s Virgin Media Inc. for $16 billion and a stake in Dutch cable operator Ziggo NV this year.

AT&T Inc., the biggest U.S. phone company, will also consider buying Vodafone once the deal with Verizon closes and would prefer it with fewer cable assets, another person familiar with the matter has said.

Marcus Smith, a Liberty Global spokesman, and Simon Gordon, a spokesman for Vodafone, declined to comment.

Elliott’s stake “could turn out to be very valuable,” Baker & McKenzie’s Becker said. “Once companies complete acquisitions and then target a squeeze-out, in the past, it has almost always paid out for minority investors.”

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