Vodafone writes €18.4bn cheque for Liberty Global assets

The acquisition has been bubbling away behind the scenes for months, but Vodafone’s €18.4 billion acquisition of Liberty Global assets in Germany and eastern Europe will test the resolve of regulators.

The transaction itself, which is expected to complete in mid-2019, will include Liberty Global operations in Germany, Czech Republic, Hungary and Romania, excluding the ‘Direct Home’ units in each of the countries. Vodafone claims the deal will make it the largest ‘next generation network owner’ in Europe, with 54 million cable/fibre customers and a potential footprint of 110 million homes and businesses.

While it will surprise few in the industry, it will also have attracted the interest of regulators. Aside from the opposition of competitors, the pair will have to prove to cumbersome bureaucrats it will not negatively impact the consumer.

“Vodafone now becomes a powerful rival to Deutsche Telekom in bundled services,” said Paolo Pescatore of CCS Insight. “However, we strongly believe that regulators will block or restrict the deal. Vodafone and Liberty Global have a relatively solid presence in the fixed-line and TV markets, so any move would cut the number of companies in both segments.”

European telcos have been crying out for consolidation for years. It allows for scale and security when considering the heavy investments which will have to be made over the coming years to remain relevant in the digital economy, however Europe is fixated on having four operators in any market, and seemingly against the idea of pan-European operations. While it seems incredibly contradictory to European Commission’s desire to use the combined weight of the European economy to compete on the global stage, it has made its position well known.

Perhaps the country where this resistance will be most notable is Germany, where market incumbent Deutsche Telekom is likely to be very vocal. Vodafone has promised the deal will enable the business to accelerate its presence in the country, targeting gigabit connections to 25 million homes, roughly 62% of the population, by 2022. DT has been sluggish in creating a network relevant for the digital economy, therefore such promises might catch the attention of the digitally thirsty government.

That said, the pair do claim to have the advantage of minimal geographical overlap across the country. Serving different customers, in different regions, is an aspect which might come into consideration, as is the Vodafone plug about streaming services. This will be a point which will have to enter into the argument as the rise in popularity of streaming services is beginning to make the number of cable providers slightly redundant. It will be interesting to see whether regulators count these two segments as complementary services, which would certainly be a benefit to the Vodafone competition argument. We suspect this will not be the case, following the illogical and dated tendencies of regulators, placing the deal under microscopic scrutiny.

DT will of course be the biggest thorn in the side here, as CEO Timotheus Höttges has already passed comments several times over recent months, denouncing the deal as “unacceptable” and accusing the pair of attempting to create a national monopoly.

“He wants to keep his dominance as the only nationalised player,” said Vittorio Colao, CEO of Vodafone Group. “The argument is quite frankly self-serving. Höttges doesn’t like the idea because he doesn’t like competition.”

Another concern should be noted from the German broadcasters, who feel the combination of the two would minimise the number of distribution partners in the country, therefore creating a suspect landscape where the balance of power is unevenly distributed. To counter this point, Colao highlighted Vodafone has no ambition of getting involved with the content game. The objective here will be to act as a distribution partner, with no intentions of owning or commissioning content. This does not completely allay the concerns of the broadcasters, though it might ease the worry about competition getting a leg-up.

In the Eastern European markets, Vodafone is talking up the converged business model. Looking across the region, Vodafone currently has 15.8 million mobile customers, which could be combined with Liberty Global’s 1.8 million broadband and 2.1 million TV subscribers. It certainly creates a solid foundation for growth through the attractive bundling offers.

Convergence is of course the key word here, and also goes to explain the timing of the deal. A tie up between the two has been on the cards for a long-time, though Colao pointed towards experience as the driver.

“It is the evolution of the business which has matured and convergence is also maturing,” said Colao.

The theoretical benefits of convergence are well-known, though in reality it is a costly and brave move to make. In Spain, Vodafone has been working to demonstrate the benefits of the convergence business model, both that it can work operationally and customers are prepared to enter into bundled contracts, which has provided the team with the confidence to move forward with the Liberty Global deal. It has been a pipedream for some time, but it reality the business and industry had to evolve to make it possible.

For Liberty Global, this deal marks a new chapter for the company. In several markets it struggles to muster the resources to compete effectively, therefore a consolidation of efforts in key markets is certainly a sensible approach. Once debt has been cleared, Liberty Global’s ‘cable cowboy’ John Malone will have just over $10 billion to invest in markets such as the UK, or Liberty Latin America, a key growth region for the business.

While this will not change the Vodafone business overnight, it follow wider trends of convergence consolidation across the continent. Similar to the likes of EE/BT, Telefonica and Orange, Vodafone is positioning itself as a much rounder player for the digital era.