Vodafone Group has agreed to buy Liberty Global's cable business in Germany, Hungary, Romania and Czech Republic for EUR 18.4 billion. The acquisition will help further its fixed-mobile strategy, allowing Vodafone to rival Deutsche Telekom for network coverage in Germany and start a converged strategy in the three eastern European countries, where it's already active in the mobile market.
Vodafone confirmed in February talks with Liberty Global on possible asset deals on the continent. The acquisition will take its fixed base to over 54 million homes in Europe, with 110 million homes passed by its cable and fibre networks and wholesale agreements. Fixed services will increase to 35 percent of its revenues in Europe from 29 percent now.
The company expects to realise EUR 535 million in annual cost and capex synergies from the acquisition, before integration costs and within five years of closing the deal. The total synergies over time should exceed EUR 6 billion, as well as EUR 1.5 billion in extra revenues from cross-selling to the combined customer base. Free cash flow per share should also benefit from the first year of the acquisition, with a double-digit boost expected from the third year, supporting Vodafone's aim to increase dividends.
The purchase price includes EUR 10.8 billion in cash and EUR 7.6 billion in existing Liberty debt. Vodafone is financing the deal using existing cash, new debt facilities (including hybrid debt securities) and around EUR 3 billion of mandatory convertible bonds. Vodafone will have the option to repurchase the shares issued under the convertible bonds, thereby avoiding equity dilution. Pro forma for the deal, Vodafone expects net debt at the end of fiscal year 2018 at the high end of its new target range of 2.5-3.0x EBITDA, in line with investment-grade credit ratings.
Regulatory approval needed
The takeover is expected to close around mid-calendar 2019, pending regulatory approval by the European Commission. Competition approval is expected to be toughest for Germany, where Deutsche Telekom and other rivals have already signaled their opposition to recreating a national cable operator.
Vodafone said the merger of its unit Kabel Deutschland and Liberty's Unitymedia will create a company able to compete with the dominant incumbent and with the scale to invest in upgrading around 25 million cable households to gigabit-speed connections within four years. The combined company will achieve around two-thirds of the German government's 2025 ambition for gigabit connectivity across the country, and will do so three years ahead of the government's schedule, Vodafone promised.
In the east Europe markets, Vodafone will add a total of 6.4 million homes passed, equal to 33 percent of homes in the Czech Republic, 43 percent in Hungary and 41 percent in Romania. The deal brings together Liberty Global's 1.8 million broadband and 2.1 million TV customers with Vodafone's 15.8 million mobile customers to enable the combined company to offer a range of new converged services to consumers and enterprise on a national basis. These businesses are also well positioned for further growth, Vodafone said, with only 28 percent of homes passed subscribing to broadband.
Liberty gains
The takeover values the Liberty Global operators at 8.6 times estimated FY 2019 EBITDA, adjusted for year-5 cost and capex synergies before integration costs, or 10.9 times EBITDA before synergies. Liberty Global said the deal is worth EUR 19.0 billion based on US Gaap, and is equal to 11.5 times the adjusted operating cash flow last year, including a multiple of 12.0x for Unitymedia. The sale will reduce group cash flow by 28 percent based on 2017 figures.
Liberty Global CEO Mike Fries said the sale represents an attractive return on investment for shareholders. Particularly in Germany, the company generated cash over six times its original investment, in the seven years since it bought Unitymedia. It will decide at a later date, closer to closing how to use the cash from the sale.
Fries noted as well that the deal was important for supporting investment and competition in Europe, creating a national challenger to incumbents. In three of the four markets, Deutsche Telekom is the incumbent (O2 in Czech Republic). "Even together, Liberty Global and Vodafone, whose cable networks don’t compete or overlap, will be half the size of the incumbent operator. It’s time to alter market dynamics by unleashing greater investment and competition," Fries said.
