Vodafone has agreed to buy Liberty Global's operations in Germany, Hungary, Romania and the Czech Republic. Germany may raise some regulatory issues, but we expect the deal will eventually win approval. The market is moving to fixed-mobile convergence, and remedies such as open cable networks or even wholesale content access can be imposed. Vodafone undoubtedly will be in search of more takeovers in eastern Europe, but faces competition from others looking to expand. More difficult will be consolidation in the UK market, but the market trends make it inevitable.
The Vodafone takeover is valued at EUR 18.4 billion. The main points include:
- Vodafone is paying 18.8 billion in cash and taking over Unitymedia's debt of EUR 7.6 billion. The company is prepared to see its leverage increase to a range of 2.5-3.0 from the current 2.0-2.5.
- Vodafone expects total synergies of EUR 6 billion (cash value, including 1.2 billion in restructuring and integration costs). That includes EUR 1.5 billion in revenue benefits and the remainder from cost savings (opex, capex). The latter should reach EUR 535 million per year within five years. Vodafone will also pay transition costs to Liberty Global to assist with issues such as IT and marketing. These are put at EUR 128 million in 2019, falling gradually to zero over four years.
- If the deal does not receive regulatory clearance, Vodafone agreed to pay a break-up fee of EUR 250 million to Liberty Global. If for some other reason the sale is not completed, Vodafone receives the break-up fee. The companies aim to complete the transaction by mid-2019.
Second national operator welcome, unless a duopoly
Deutsche Telekom and Vodafone both accuse each other of market domination, while the challengers Telefonica Deutschland and United Internet fear a duopoly. Former PTTs, the telephony incumbents, have national coverage and are checked by regulation. If a national cable company is created (the incumbent in TV), this could raise concerns of dominating the retail TV market. However, this should no longer be a problem: 1) See the Netherlands, where the merger of Vodafone and Ziggo was approved; 2) the PTT is also national, and the cable could be regulated, too, as is already the case in Belgium and soon the Netherlands; 3) there is dynamic competition on the TV market, including from the PTT, and price changes are not a matter for concern; 4) the relevant markets are increasingly multiplay and wholesale; and 5) the pay-TV market is in a structural decline due to the rise of on-demand services.
All of above make it increasingly difficult to oppose the creation of a second national operator. In areas where the PTT is still dominant (DT has 40% of the broadband market), the second national operator (70% of the TV market) can provide a boost to competition. One danger is the creation of a duopoly, as the big players want to be number one or two in all their markets. Symmetric regulation, where both networks are covered, can ensure competition on the wholesale market, allowing challengers (virtual operators in fixed and/or mobile) to improve their cost base and provide competition on the retail market. The market is moving towards horizontal integration (fixed + mobile), and open cable is the obvious remedy.
SMP in media
To be sure, it's important to define the relevant market properly. Vertical integration (media + telecom, so content + distribution) at cable/mobile operators can create a significant market power in media. Mandatory wholesale access to content is a possible solution. The question is whether this is necessary. To start with, the situation does not change for the consumer. Vodafone and Liberty Global note that their German cable networks do not overlap, so they do not compete with each other. Second, the content market is very dynamic, with an external player the main competitor: Netflix (and in Germany, also Amazon, Maxdome, etc.).
Future of Liberty Global: east Europe and uncertain UK market
What does this mean for the future of Liberty Global? It's clear the company is more interested in actively managing its portfolio than building a pan-European player. It will likely search for buyers for its remaining assets or seek to acquire more mobile operators to build converged operations.
Orange, Deutsche Telekom and Telekom Austria are all active in east Europe and could be interested. There are more companies out there seeking expansion as well, such as Altice (France, Portugal), Iliad/NJJ (France, Ireland, Italy, Switzerland) and PPF/Petr Kellner (Czech Republic, Slovakia, Hungary, Bulgaria, Serbia, Montenegro). Vodafone is not likely finished either. In Hungary (43% cable coverage), Czech republic (33%) and Romania (41%), the acquisition should not face regulatory problems and made lead to more takeovers in future.
The remaining question is what will happen on the British market, now that a merger between Vodafone and Virgin Media appears to be ruled out. Further consolidation appears unavoidable. BT (incl. EE), Virgin Media (incl. MVNO), Vodafone UK (alliance with CityFibre) and Sky (to become part of Disney or Comcast) are all well-established players. What remains is O2 UK/Telefonica (mobile operator and virtual fixed player), 3 UK/CK Hutchison (mobile-only) and TalkTalk (virtual in fixed and mobile, with a recent fibre venture with Infracapital). The question is not if but when the market consolidates.
