Vodafone/Kabel Deutschland Merger Bodes Well For Europe, but Recession Could Dampen Demand for Quad-Play

“This demand is being driven by three key factors: a widening range of powerful and attractive smartphones and tablets; significant improvements in mobile network quality and capability; and an increased choice of user friendly and useful applications for business and social use,” according to Vodafone.

But despite the overall trend in Europe, there is nevertheless a danger to Vodafone making too many fixed-line acquisitions to stay on par with its competitors, according to Chew. It’s unclear, he said, just how fast the uptake of quad-play services—the combination of broadband Internet access, television and telephone services with wireless service provision—in Europe will happen and how much more consumers are willing to pay for high speed data downloads and other services, particularly at a time when Europe is facing a weak economic environment.

“The price point and the speed of take-up by consumers, as well as the response of its competitors, are the main factors in whether Vodafone’s investments in fixed networks will be deemed successful,” Chew said. “It isn’t yet clear how many customers will want all their services from one single provider, so seeing how consumer demand unfolds will play a significant part in how Vodafone moves forward, even if the Kabel Deutschland deal does result in significant synergies between the companies, including marketing and distributing, and improving overall efficiency.”

Nevertheless, most of the investment community is excited about the Vodafone/Kabel Deutschland deal, if for nothing else but for the fact that it’s the second largest European M&A deal this year.

“I think it’s going to be a trigger and that we’ll see a raft more M&A activity, broadly speaking,” Peak said. “Not only are their cash rich balance sheets a catalyst for many companies, but one other major motivating factor is interest rates and where they’re headed, so for any company that’s going to take on debt, it’s best to move now rather than hesitate, because if interest rates are higher 12 months from now, so, too, will be the price of any acquisition.”

After the Verizon sale goes through, Vodafone won’t have any more holdings in the U.S., but will have about $30 billion in cash left over to reduce its debtload (the company was keen to maintain its single-A-minus credit rating, Chew said, which is why it chose to sell its Verizon Wireless as opposed to taking on more debt), make acquisitions and further build out its broadband Internet and faster, fourth-generation mobile networks.