Deutsche Telekom has announced a €1.9 billion deal ($2.3 billion) to acquire Austrian cable provider UPC from Liberty Global. Deutsche Telekom has the second largest mobile subscriber base in Austria, behind Telekom Austria, while UPC is second only to Telekom Austria in the market for fixed broadband services. The agreement, therefore, will create a strong converged operator with the subscriber base and infrastructure to challenge incumbent and market leader, Telekom Austria.
Deutsche Telekom extends convergence strategy to Austria
It has been a busy December for Deutsche Telekom in Europe – the UPC Austria agreement comes exactly one week after the announcement of its intention to acquire Tele2 Netherlands.
Like the agreement with Tele2 Netherlands, the rationale behind Deutsche Telekom’s acquisition of UPC Austria is the company’s ambition to offer converged bundles of fixed broadband and mobile services across its European operations. Austria is Deutsche Telekom’s last European mobile-only business, and the acquisition of UPC Austria provides it with a base of 1.5 million cable broadband homes to which it can cross-sell mobile services.
Deutsche Telekom’s convergence strategy has been relatively successful in Germany with 18% of fixed broadband households subscribed to its MagentaEINS converged bundles, which launched in April 2014. Deutsche Telekom has been rational in its approach to convergence in Germany, opting against using aggressive discounts to drive take-up of converged bundles, a tactic used by operators in France and Spain several years ago. IHS Markit expects Deutsche Telekom to continue its rational approach in Austria, where mobile prices are already low compared with the rest of Western Europe.
While the motivations between Deutsche Telekom’s Dutch and Austrian acquisitions may be similar, the deals are likely to face very different levels of regulatory scrutiny. T-Mobile Austria does not currently offer fixed broadband and UPC Austria has less than 60,000 MVNO subscribers. Consequently, there is little overlap between the operators and regulatory approval can be expected relatively quickly. In the Netherlands, however, the move to consolidate the Dutch mobile market from four to three mobile operators is a political hotbed and the deal must overcome significant regulatory hurdles if it is to be approved.
Liberty Global focusses on M&A in markets where it lacks scale
Liberty Global’s decision to exit the Austrian market is unsurprising; UPC’s fixed-line subscriber base is less than one-third of the size of the market leader’s (Telekom Austria) and it has had limited success in terms of fixed-mobile convergence, having only upsold 3% of its broadband subscribers to mobile by the end of 2016. The move by Liberty Global to sell UPC Austria is therefore in line with the company’s strategy to focus on countries where it has a greater market share.
The funds generated by the sale of UPC Austria provide Liberty Global with greater flexibility to compete in other markets, namely Switzerland and the UK. Recently, Liberty Global CEO Mike Fries reiterated the company’s commitment to Switzerland after speculation that Liberty Global might look to divest its Swiss operations. Buoyed by the acquisition of key sports rights, UPC is set to increase its aggressiveness in mobile and a new MVNO agreement is expected shortly. The UK, on the other hand, remains highly fragmented and Liberty Global, operating under the Virgin Media brand, requires consolidation in the market in order to compete more effectively. Virgin has struggled to grow its mobile base, despite launching 4G services in November 2016, and, likewise, its pay TV growth has stagnated despite continued deployment of its cable network into new areas.
Both in the UK and elsewhere in Europe, Liberty Global is seeking to execute a comprehensive fixed-mobile convergence strategy of its own, the most likely path to which is a pan-regional tie-up with mobile operator Vodafone. Talks between the two companies first took place in 2015, but an agreement could not be reached – although they did strike a deal to operate a joint-venture in the Netherlands in 2016. The sale of UPC Austria removes one potential obstacle to a full-scale tie-up, with Liberty apparently streamlining its operations by divesting less attractive assets and reducing the number of markets in which it does not overlap with Vodafone.