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

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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.

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.


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