A Key Victory in the Battle for the European Cable Market
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After a surprisingly contentious bidding war that received relatively little press in North America, British telecom giant Vodafone (LSE: VOD) appears to have won the right to purchase Germany cable conglomerate Kabel Deutschland (KD8) over Liberty Global (NASDAQ: LBTYA). Although Vodafone's initial offer was more than 5 percent lower than Liberty Global's, Kabel Deutschland appeared to prefer its structure. As a larger company with an international reach, Vodafone may also have appeared to offer more stability.
This deal offers a number of obvious synergies and should give Vodafone a stronger foothold in Europe's strongest consumer market. Although it represents an embarrassing setback for Liberty Global, it seems unlikely to affect the U.S. company's long-term financial strength. Given the new debt that the deal would have required Liberty Global to assume, it may actually turn out to be a blessing in disguise for the company. Investors who wish to play this deal should take a moment to learn about the bidding war and the potential implications for Vodafone.
Vodafone and Liberty Global are very different from one another. The former is a diversified telecommunications company with customers in dozens of countries and a robust portfolio of media properties. Liberty Global is a more narrowly focused firm that provides cable TV and telephone connectivity to customers in continental Europe and South America. Both of these firms compete with publicly traded Deutsche Telekom AG (NASDAQOTH: DTEGY.PK).
Vodafone is the largest of the three firms. Its market capitalization of $133 billion exceeds that of Liberty by a factor of nine and is roughly triple that of Deutsche Telekom. In addition, its 2012 revenues of $71.5 billion dwarf Liberty's $10.5 billion take. However, Deutsche Telekom actually took in $3 billion more than its British rival during fiscal 2012. Meanwhile, Vodafone earned about $690 million during the same period. Liberty lost about $575 million, and Deutsche Telekom hemorrhaged nearly $7 billion.
Vodafone has far less leverage than Liberty or Deutsche Telekom. Its $20 billion cash hoard compares to a manageable debt load of about $66 billion. By contrast, Liberty Global has about $10 in debt for every $1 in cash on its books. Deutsche Telekom struggles with debts of $58 billion and a cash pile of about $7.8 billion. It seems obvious that Vodafone is better-positioned to afford Kabel Deutschland's $10 billion price tag.
Although the bidding war for Kabel Deutschland lasted for just a few weeks, it produced ripple effects throughout the telecommunications industry. Vodafone had initially offered 80 euros per share for the bulk of Kabel Deutschland's operations. Soon thereafter, Liberty countered with an 85 euro per share offer of its own. Convinced that Liberty was unwilling to go higher, Vodafone came back with an 84.5 euro per share offer that featured an additional 2.5 euro per share dividend for Kabel Deutschland's shareholders. In late June of 2013, Kabel Deutschland indicated that it would accept this offer.
How the Winning Bid Is Structured
The terms of the winning bid are fairly easy to understand. According to reports, the deal will require Vodafone to issue cash payments of 84.5 euros per share to Kabel Deutschland shareholders of record as of a yet-to-be-determined date. It will also require Kabel Deutschland to issue dividend payments of 2.5 euros per share to the same shareholders at the time of the deal's closing. Relative to Kabel Deutschland's current price, this offers a very small premium of less than 1 percent.
Market-watchers believe that the Vodafone-Kabel Deutschland merger will have an easier path through the European regulatory regime. Indeed, the Liberty Global deal may have been doomed to fail due to the company's already-robust presence within Germany.
Additional Issues and Potential Complications
In comparison to the Liberty Global bid, this deal should face a relatively easy approval process. However, it still needs to be approved by Kabel Deutschland's shareholders and must win favor from European regulators. While the latter step is all but assured, it is possible that shareholders could vote the deal down on the expectation that Vodafone will come back with a still-higher offer. However, this seems relatively unlikely. Separately, it is possible that Liberty Global will return to the fray with another bid. Some market-watchers believe that Liberty Global was never serious about buying Kabel Deutschland and had merely entered the process to force Vodafone to pay a higher price. An additional bid would clearly make things even more difficult for the British company without materially affecting the situation's outcome.
Long-Term Outlook and Possible Plays
Barring an unexpected push from Liberty Global or another cable provider, it seems likely that this deal will pass regulatory muster and close by the early part of 2014. Going forward, investors can expect Vodafone to put pressure on Liberty Global's German operations and make life difficult for other media providers in the space as well. Given the synergies inherent in the deal and the fact that the German market has avoided the consumer spending drops that have plagued other areas of Europe, investors may wish to play this deal with a long position in Vodafone. With a stable outlook and a solid dividend, Vodafone may have considerable room to run.
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Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!