Vodafone's $22 Billion Liberty Deal Reshapes Europe TelecomBy and
Tie-up seeks to challenge Deutsche Telekom in Germany
Deal follows years of on-and-off discussions on mergers, swaps
Vodafone Group Plc is shaking up Europe’s fragmented media and telecom market with an 18.4 billion-euro ($22 billion) deal to buy almost a third of Liberty Global Plc, part of a global push for scale as carriers face massive network investments and competition from digital players.
With the acquisition of Liberty Global’s German and Eastern European units, Vodafone Chief Executive Officer Vittorio Colao is reshaping spheres of influence in a way that has already drawn a harsh rebuke from his closest rival, Deutsche Telekom AG. The purchase, the largest by Colao in his decade running Newbury, England-based Vodafone, threatens the continent’s biggest carrier Deutsche Telekom in its home market.
The deal, announced Wednesday after months of talks, has the CEO of German’s former phone monopoly spitting fire. Tim Hoettges, seeking his own $26.5-billion American tie-up of unit T-Mobile US Inc. with Softbank Group Corp.’s Sprint Corp., vowed to fight against what he characterized as a remonopolization of Germany’s cable market by Vodafone, while Colao appealed to ambitions by European regulators to challenge incumbents to invest.
“The EU has always been talking about the need to have cross-country competitors in telecoms,” Colao told reporters on a call. “This is actually the first and biggest creation of one of those, both in mobile and fixed.”
The transaction gives Vodafone, already Germany’s largest cable operator, the second-biggest cable network, as well as Liberty Global’s Czech Republic, Hungary and Romania divisions, providing more scale to bundle internet, phone and TV services. It follows years of on-and-off talks between Vodafone and U.S. billionaire John Malone’s Liberty Global. While the two inked a joint venture in the Netherlands in 2016, discussions about more transformative mergers or asset swaps had stalled on disagreements over valuations and debt.
Vodafone rose as much as 2.4 percent, trading at 209.80 pence as of 3:19 p.m. in London. Liberty Global, listed in New York, fell as much as 10 percent, the most intraday since June 2016. The deal’s value came in lower than analysts had expected, with the consensus having estimated a price tag over 20 billion euros, J.P. Morgan analysts led by Akhil Dattani wrote in a note.
Vodafone will pay Liberty Global 10.8 billion euros of cash and assume 7.6 billion euros of debt, Vodafone said. After paying for the integration, cost and capex synergies are valued at 6 billion euros by Vodafone, while revenue synergies amount to 1.5 billion euros.
The companies both seek to be top carriers in each of the markets where they operate, but Liberty Global had been struggling to find a way to gain clout with mobile services in Germany. Vodafone in February said it was in talks with Liberty about acquiring some continental assets where the two compete.
The agreement appears to signal a retreat by Malone, by focusing Liberty Global more on the U.K. and Ireland, its largest market, and follows the sale of its Austrian cable division to Deutsche Telekom late last year. However, Liberty Global could choose to take the cash and double down in markets where it can buy rivals to scale up.
“We’re moving to a region that’s going to be dominated by a handful of players,” said Paolo Pescatore, a media and telecom analyst at CCS Insight in London. “We expect Liberty to use these funds to strengthen its position on other markets such as the U.K.,” or in Switzerland, he said.
The deal marks a significant consolidation for European carriers, which remain significantly more fragmented than their U.S. peers. It will face scrutiny from regulators, either in Germany or at the European Union, the latter having blocked the merger of CK Hutchison Holdings Ltd.’s Three and Telefonica SA’s O2 in the U.K. in 2016.
Hoettges in February called for such a deal to be blocked, saying the convergence of TV and cable services at such a scale could be harmful for democracy in the country, and on Wednesday said the tie-up would "distort competition" by creating a "giant.” Deutsche Telekom was forced by regulators to sell off its cable assets last decade and Colao suggested his counterpart’s remarks stemmed from concern about increased competition.
The deal is “exactly exactly what German market needs, which is a stronger, more consolidated competitor to Deutsche Telekom in a market that has really lagged in innovation and investment,” Mike Fries, Liberty Global’s CEO, said in an interview. “So I think this will get approved and I think it’s definitely in the best interests of consumers and we’ll make that argument.”
The tie-up, scheduled to close around mid-2019, may not mark the end of Liberty and Vodafone’s discussions. Executives on both sides have publicly mused about the potential for a merger of the companies, to create a European challenger with the mobile and fixed assets to better take on incumbents.
On Wednesday, Colao told reporters a deal in the U.K. is not on the agenda and that Vodafone is very happy with how the Netherlands arrangement is working, while Fries said no other arrangements are currently being contemplated.
Still, the transaction sets the stage for Vodafone to potentially scoop up the rest of Liberty Global in a few years, if it’s cheap enough, said RBC analyst Jonathan Dann. After acquisitions by Deutsche Telekom in the Netherlands and Austria and its move for Sprint in the U.S., as well as Wednesday’s acquisition by Vodafone, the telecom deals that make sense for the major European players are finally happening, Dann said.
“I think now Vodafone hope Liberty will now be very Swiss, Belgian and U.K.-centric and very underperforming, and then be cheap,” Dann said.
— With assistance by Stefan Nicola