The acquisition of Germany’s largest cable provider, Kabel Deutschland, by Britain’s Vodafone is exciting news that bodes well for merger and acquisition activity in Europe, for the future of the technology, media and telecommunications (TMT) sector there and of course, for the two companies involved themselves.
Vodafone, which sold its stake in U.S. operator Verizon Wireless in order to be able to finance the Kabel Deutschland transaction without taking on any new debt, has secured more than 75% of the minimum shareholder approval needed to see the deal, which is set for a first review by the European Commission on September 20. And although some investors felt the deal was on the rich side for the company, others including Stephen Peak, head of global equities at Henderson Global Investors in London, and manager of its European absolute-return equity strategy, are viewing it as a strategic step forward for Vodafone, one that makes sense for its business going forward with respect to market penetration and business synergies.
Furthermore, many companies in Europe, despite the overall macroeconomic environment and recession, are actually cash-rich and ready to make acquisitions in their respective sectors, Peak said. Most large European corporates, Vodafone included, have strong balance sheets, he said, so “I say ‘watch this space,’ as it isn’t the first deal of this kind we’re going to see.”
Vodafone is primarily a mobile wireless operator and most of its main competitors in Europe are ex-state owned telecoms companies with both fixed and mobile networks, said Damien Chew, senior director, corporates, at Fitch Ratings in London. The company’s mobile businesses are usually ranked either first or second in each of the European countries it operates in, yet Vodafone doesn’t have a very strong fixed line presence, which is one of the main motivations for the Kabel Deutschland acquisition.
“The European telecoms markets are moving toward integrated fixed and mobile services, and if Vodafone cannot offer these bundled offerings, it may risk falling behind,” Chew said.
In its 2012 Annual Report, Vodafone clearly stated its goal of becoming the provider of choice for customers wanting to use data Internet services on their mobile phones. The company’s fastest growing business segment is data, Vodafone said, up by 22.2% for 2012 compared to a 4.4% rise for messaging revenue and a 4% fall for voice revenue.
“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.