British multinational telecommunications conglomerate Vodafone Group Plc has agreed to buy Liberty Global Plc’s German and Eastern European units for €18.4 billion, a deal that shakes up the region’s TV and broadband market as it seeks to challenge its main rival Deutsche Telekom.
The deal comes after years of on-again, off-again discussions that saw Vodafone agree to buy Liberty Global’s Unitymedia, Germany’s second-largest cable network. The two companies had previously agreed to a joint venture in the Netherlands back in 2016, but more transformative mergers or asset swap talks never materialised.
Vodafone’s new cable footprint puts the company in direct competition with Deutsche Telekom AG by providing the UK telecom giant with more scale to bundle internet, phone, and TV services. “This transaction will create the first truly converged pan-European champion of competition,” Vodafone Chief Executive Officer Vittorio Colao said in a statement.
Vodafone has also agreed to take over the East European brand UPC, giving it a significant market share in the Czech Republic, Hungary, and Romania.
“It represents a step change in Europe’s transition to a gigabit society and a transformative combination for Vodafone that will generate significant value for shareholders, said Colao. “We are committed to accelerating and deepening our investment in next-generation mobile and fixed networks and building on Vodafone’s track record of ensuring that customers benefit from the choice of a strong and sustainable challenger to dominant incumbent operators.”
Liberty Global to the rescue
Unlike Vodafone and UPC, Liberty Global had been struggling to find a way to gain clout with mobile services in Germany. Vodafone has agreed to pay Liberty Global €10.8 billion in cash, while also assuming €7.6 billion of its debt.
As a result of the agreement and the sale of its Austrian cable division to Deutsche Telekom late last year, Liberty Global will now focus more on the UK and Ireland, its largest market.
Vodafone is financing the deal using existing cash, new debt facilities (including hybrid debt securities), and an estimated €3 billion of mandatory convertible bonds. The company will also have the option to repurchase shares issued under convertible bonds, thereby avoiding equity dilution. Opportunities to sell Liberty Global’s broadband, phone, and TV services to Vodafone’s existing customers will allow for revenue synergies, which the company values at €1.5 billion.
The takeover is expected to close around mid-2019, as the transaction has to be cleared by the European Commission’s competition watchdog. Competition approval is expected to be toughest for Germany, as Deutsche Telekom and Germany’s fibre association have signalled that they oppose the deal and are expected to apply pressure to the German Cartel Office.
Vodafone’st Kabel Deutschland and Liberty Global’s Unitymedia are expected to create an entity capable of competing with Deutsche Telekom’s dominant position. The newly merged company could be in place to achieve around two-thirds of the German government’s goal for gigabit connectivity by 2025 – a move that Vodafone has vowed to fulfil three years ahead of schedule.
Vodafone is expected to cover a total of 6.4 million households in Eastern Europe, equal to 33% of homes in the Czech Republic, 43 % in Hungary, and 41 % in Romania.
The deal will add to Vodafone’s existing 15.8 million mobile customers by bringing Liberty Global’s 1.8 million broadband and 2.1 million TV customers under its wing.