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Sunday, 23 November 2014

Cable bills

Savings make Vodafone’s Kabel deal palatable

Cost savings make Vodafone’s punchy bid for Kabel Deutschland palatable. The London-listed mobile giant has offered a hefty 10.7 billion euros ($14.0 billion), including debt, for Germany’s largest cable operator. Sceptics think Vodafone can be ponderous and profligate in M&A. But this looks acceptable - provided Vodafone can reap the promised financial benefits.

The 87-euros-a-share offer, which Kabel Deutschland’s boards plan to recommend, values the company’s equity at 7.7 billion euros. With debts of 3 billion euros, the enterprise value is 12.4 times EBITDA for the year ended March 2013, or 11 times current year figures.

These are huge multiples. Between floating in 2010 and the point when Vodafone’s interest emerged last February, Kabel Deutschland traded at an average 7.7 times forward EBITDA. Liberty Global, the international cable group, paid 8 times forward EBITDA - or roughly $24 billion - for Virgin Media earlier in the year.

Still, the acquisition makes clear strategic sense for Vodafone. It wanted to defend its biggest European market; adapt to a world in which cable, broadband and mobile are increasingly sold together; and stop Kabel being snapped up by Liberty. (Having made one counter-proposal already, Liberty could yet return, but the odds are stacked against it.)

But Vodafone will save heaps by putting the two networks together, paying less in wholesale fees to Deutsche Telekom, and buying in bigger scale. In total, cost cuts and curbs to capital expenditure could be worth 3 billion euros in net present value terms, or nearly 34 euros a share. This is above some analysts’ estimates - and far outstrips the 2.05 billion euro premium Vodafone is paying to Kabel Deutschland’s undisturbed share price. That said, extra sales could add another 1.5 billion euros in NPV, though investors are understandably less excited by such “revenue synergy” promises.

Critics think Vodafone is lumbering and, remembering mega-deals in Germany and India, liable to overpay. This deal may entrench such prejudices. Compared to Liberty’s purchase of Virgin Media, which was quick, quiet and reasonably priced, this has been slow, expensive and extensively trailed. And a more far-sighted Vodafone could have pounced cheaply in 2010. Still, the deal-making under current Chief Executive Vittorio Colao has generally looked smart. If the Kabel Deutschland promises materialise, he should preserve that reputation.

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Vodafone plans to buy Kabel Deutschland, Germany’s biggest cable operator, the two companies said on June 24. The deal, which will be conducted as a voluntary tender offer, values the target at 87 euros a share. That equates to a total 7.7 billion euros, or an enterprise value of 10.7 billion euros including assumed debt. The price includes a previously announced dividend of 2.50 euros a share.

Kabel Deutschland’s management and supervisory boards plan to recommend the offer to shareholders. Vodafone will fund the deal from existing cash and undrawn bank facilities. Vodafone said it expects to make savings on costs and capital expenditure with a net present value (NPV) of more than 3 billion euros, after integration costs. It says boosts to revenue from cross-selling products and retaining more customers should be worth another 1.5 billion euros in NPV terms.

Twelve days ago Vodafone disclosed a preliminary approach to Kabel Deutschland. That prompted a counter-proposal from Liberty Global, owner of Germany’s second-biggest cable group, which Reuters said valued the company at 85 euros a share.

Goldman Sachs and UBS advised Vodafone. Morgan Stanley and Perella Weinberg advised Kabel Deutschland.

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