Vodafone agrees €18bn deal for Liberty Global assets

July 2018 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2018 Issue

After months of negotiations, Vodafone announced that it is to acquire Liberty Global’s cable TV and broadband businesses in Germany and eastern Europe in a deal worth €18.4bn. The deal, once completed, will be Vodafone’s biggest acquisition since its £112bn deal for Mannesmann in 2000.

The deal, which still requires European Commission regulatory approval, is expected to close around mid-2019. Vodafone will pay Liberty Global €10.8bn in cash and assume €7.6bn of outstanding debt.

However, the transaction will be scrutinised by regulatory authorities in Germany, as well as the European Union, given the increasingly fragmented nature of the European telecoms industry.

The deal will see Vodafone, already Germany’s largest cable operator, become the owner of the country’s second-biggest cable network. The deal for Liberty’s operations in Germany, Hungary, Romania and the Czech Republic, which accounted for approximately 28 percent of the company’s consolidated operating cash in 2017, not including the 50 percent operating cash flow from its Dutch joint venture VodafoneZigg, will also provide Vodafone will additional scale to bundle ‘quad play’ internet, television and telephone services.

The newly enlarged Vodafone will have around 54 million cable TV and broadband customers across Europe, and a potential footprint of 110 million homes and businesses. The deal is the latest step in Vodafone’s attempt to shake up the media and telecoms industry and significantly strengthens its position in the German telecoms market.

Vodafone has promised the deal will enable it to target gigabit connections to 25 million homes, roughly 62 percent of the population, by 2022. But the deal has attracted criticism from the country’s leading telecoms company Deutsche Telekom. Timotheus Höttges, Deutsche Telekom’s chief executive, believes the deal would negatively impact competition in the sector. “I personally will fight for fair competition for our customers, to ensure that we do not face a disadvantage,” said Mr Höttges. Yet Vodafone chief executive, Vittorio Colao, said that the deal would lead to stronger competition for Deutsche, which has reported a year-on-year decline of 3.9 percent in total revenues for the first quarter of 2018.

Mike Fries, chief executive of Liberty Global, said: “We have a rich history at Liberty Global of successfully developing and reshaping our business to drive innovation, advance customer services and create significant value for shareholders. This is one of those moments. The transaction appropriately values our core cable operations at a double digit OCF multiple and will deliver €10.6bn ($12.7bn) of estimated cash proceeds to Liberty Global. Plus, we will retain all cash generated from the four businesses through closing. In Germany alone, which we value at 12 times 2017 adjusted Segment OCF, we will have generated over six times our original investment, supported by exceptional operating performance over the last seven years during which we grew revenue 60 percent and OCF 82 percent.”

Mr Colao said: “This transaction will create the first truly converged pan-European champion of competition. 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. We are committed to accelerating and deepening investment in next generation mobile and fixed networks, building on Vodafone’s track record of ensuring that customers benefit from the choice of a strong and sustainable challenger to dominant incumbent operators. Vodafone will become Europe’s leading next generation network owner, serving the largest number of mobile customers and households across the EU.”

Discussions regarding a possible deal between Vodafone and Liberty have been on and off since 2015, when the companies discussed a possible asset swap. Negotiations recommenced in February 2018 and a deal was finally struck. Vodafone will pay a €250m break fee if the acquisition collapses.

Richard Summerfield