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Snafu of Liberty

12 June 2013 By Quentin Webb

Vodafone’s ambitions in Germany could be undone by the king of cable. The British mobile giant has finally admitted it wants to buy Kabel Deutschland, the country’s biggest cable operator. Yet John Malone, the pay-television magnate behind Liberty Global, must be thinking hard about whether he can afford to make a rival approach. At the very least he could make life hard for Vodafone.

At more than 10 billion euros including debt, Kabel Deutschland would be both big and expensive. Vodafone’s opening gambit was 81 to 82 euros a share, Reuters says. That equates to a lofty 10.6 times 2014 EBITDA, on Espirito Santo numbers. The lure is the chance to shore up Vodafone’s position in its largest non-U.S. market, giving it a credible “quad-play” offering and significant savings, chiefly by bypassing a wholesale deal with Deutsche Telekom. JPMorgan has estimated synergies could have a present value of 2.3 billion euros.

Yet Kabel Deutschland is also attractive to Malone, a serial deal-doer busy assembling a pan-European cable empire. He already owns the number two in the German market, Unitymedia Kabel BW, and is a big believer in scale. Liberty’s chief executive, Mike Fries, said recently it would “love to be bigger” in Germany.

Vodafone is the better bet to acquire Kabel Deutschland. It has more financial firepower and bigger potential synergies. In contrast, the ink has only just dried on Liberty’s $24 billion merger with Britain’s Virgin Media. Malone hates overpaying, as shown recently in Belgium, has alternative targets, and might struggle to convince German trustbusters.

But Malone has some leverage here. He could break with tradition and pay a lot for strategic reasons, chiefly in shares. Or he could just make mischief by showing an interest. Bid hopes have already inflated the shares. Pushing up the asking price further would force Vodafone to choose between overpaying or leaving empty-handed. Vodafone cannot afford to test its investors’ patience too much, thanks to a patchy long-term record on M&A. If the deal collapsed, Liberty could always pounce at a later date.


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