Quad-Play Is the Next Big Thing

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The initial post references Liberty Media. The post has been modified to reflect Liberty Global. Motley Fool apologizes for the error.

The entire telecom industry is going to through a restructuring process. In the last few months, a number of M&A related stories have hit the market. Whenever an industry reaches its maturity, there is industry wide consolidation. This consolidation serves a number of purposes, most importantly price based competition. As dominant players in maturing industries are cash rich, a lack of organic growth opportunities forces them to pay large dividends. An alternate method is to look for acquisitive growth in a mature industry that doesn’t offer organic growth.

The pursuit of this growth is the primary reason for the intensive M&A efforts in the telecom industry. Leading industry players like Vodafone (NASDAQ: VOD), Sprint Nextel, Clearwire and Verizon are all looking for mergers or acquisitions. Companies operating in mature industries are usually dividend players and offer little in terms of capital gains. M&A can cause rallies even in these sluggish securities and provide lucrative investment options for investors.

Quad Play

Vodafone is the world’s second largest telecom operator in terms of subscribers and revenues. The company has approximately 439 million subscribers, spread across 70 countries. It is an acquisition juggernaut and has been involved in M&A in almost every corner of the wrold. Vodafone has been in the news for trying to buyout Kabel Deutschland, the German cable company.

Vodafone has strategic reasons to buy Kabel. There is a growing demand in Europe for television, broadband, mobile and fixed-line under the same brand. This ‘quad play’ is the next big thing in European telecom industry. Germany is its largest European market and Vodafone is determined to provide the comprehensive coverage that the market demands. Before trying to acquire Kable, the telecom giant had approached Deutsche Telekom for renting lines. This would have allowed Vodafone to provide TV and broadband services in Germany, through rented lines from Deutsche Telekom.

Despite this wholesale DSL deal with Deutsche Telekom, Vodafone has still decided to acquire Kabel. This might be an indication of another upcoming trend in the telecom industry. It is an indication that infrastructure ownership is crucial for ‘quad play’ ambitions. It is highly likely that this trend will repeat itself across other global markets and cash rich giants would continue to amass telecom infrastructure. Another example from across the ocean is the struggle of Sprint and Dish to control Clearwire.

The Deal

Originally, Vodafone had offered to buy Kabel for 81 Euros per share, 10% premium to its recent offer of 7.2 billion euro ($9.6 billion). This offer had induced a rally in Kabel shares. The situation got even more interesting when Liberty Global (NASDAQ: LBTYA) entered the negotiations with an 85 euro per share offer of their own. Liberty Global has emerged as one of the biggest telecom empires in Europe and is on an acquisition spree.

Liberty Global will face a greater challenge in its Kabel ambitions. This is because the company already owns Unitymedia, the second largest cable company in Germany. It will face resistance from German authorities because the transaction might trespass on anti-competition/anti-trust laws.

On Wednesday, Vodafone announced that it will match the 85 euro per share bid of Liberty and is ready to pay as much as $10 billion in cash. On the other hand Liberty is not willing to pay cash and will trade assets for the coveted Kabel.

Kabel’s price has been consistently rallying on acquisition rumors, and I believe it will continue to rise. According to reports, Kable will not accept the 81 Euro per share bid and would take nothing less than 90 per Euro. Vodafone is in a better position to buy Kabel and will be the victorious party in this bidding war.

Bottom-line

The telecom industry has become alive with the struggle to supplement organic growth with acquisitive growth. All across the globe, leading industry players are engaged in bidding wars to control telecom infrastructure. This has greatly improved the valuations of industry wide valuations.

The acquisition of Kabel will be highly beneficial to Vodafone and will allow it to offer quad-play in Germany. Vodafone already offers quad services in Portugal and is well aware of the success of this model. Other leading players like Telefonica and France Telecom offer quad-play in Spain and France. The valuations of Vodafone will be positively affected if it closes the Kabel deal.

 The shareholders of Kabel will not agree to anything below 90 euros, and there are indications that Vodafone will agree to pay this amount. Vodafone and Kabel are both sound investments and can show significant appreciation in the coming week on acquisition news.

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Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Vodafone. 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!

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