Vodafone is to acquire Liberty Global’s assets in Germany, the Czech Republic, Hungary and Romania, for a total value of €18.4 billion ($22.7 billion).
A major agreement with the two operators has been long anticipated, with both groups announcing they were in discussions in February 2018 over certain overlapping European assets, following previous talks that dated as far back as June 2015. However, previously, the two companies had been unable to reach a pan-European deal, with a 50:50 joint venture in the Netherlands, announced in January 2016, being the only agreement between the two companies thus far.
Today’s transaction is the latest in a series of M&A deals involving European mobile operators and cable companies, with similar agreements reached in Austria and Sweden in the last few months. Vodafone itself has a history of acquiring cable companies, having previously concluded deals for ONO (Spain) and Kabel Deutschland.
Mergers between mobile operators and cable companies present opportunities for considerable cost savings. This was the rationale presented by T-Mobile after it acquired Liberty Global’s UPC Austria, and Tele2 and Com Hem detailed similar benefits following their recent merger in Sweden. Vodafone expects €535 million of cost and capital expenditures savings from its transaction with Liberty Global, largely derived from network integration and IT/billing simplification.
Today’s transaction also presents significant revenue synergies, largely through the cross-selling of services to existing customers. Vodafone’s operations in the UK demonstrate how difficult it can be to organically build a converged customer base, and M&A provides a shortcut for operators looking to diversify offerings. The deal with Liberty Global will provide Vodafone with fixed broadband or pay TV services in the Czech Republic, Hungary and Romania, while in Germany there is no overlap between Vodafone and Unitymedia’s cable networks, which further increases expansion potential. As a result, Vodafone estimates revenue synergies of more than €1.5 billion from the transaction.
If the transaction is approved, Vodafone will assume a leading position in the European subscription video market, behind only Sky and Netflix. The addition of the TV subscribers offered by Liberty will bring Vodafone’s total close to 23 million subscriptions in 2019 – representing a challenge to Sky’s pan-European market share, which had 22.9 million subscriptions to its pay TV and OTT services at the end of 2017.
The proposed acquisition of Unitymedia in Germany could face strict regulatory scrutiny
Vodafone already owns Germany’s second largest cable network, following its acquisition of Kabel Deutschland in October 2013. Purchasing Unitymedia’s cable network, which crucially does not overlap with Kabel Deutschland’s cable footprint, would extend its reach to the equivalent of 63% of German households, which is only slightly below the 71% of German households reached by incumbent Deutsche Telekom’s FTTx network. Nevertheless, Deutsche Telekom will remain the leader in Germany in terms of fixed broadband households, even if Vodafone’s acquisition of Unitymedia is approved.
Where close regulatory investigation is more likely is in the Germany pay TV market. A move to combine Unitymedia and Vodafone will create a clear leader, with nearly three times the TV RGUs of nearest rival Sky’s German subscriber base. The deal would also result in Vodafone owning the majority of Germany’s level 3 cable infrastructure, which represents the connection between transfer points outside the subscriber’s home and TV signal distribution networks. Vodafone has already stated its willingness to pay a €250 million break fee to Liberty Global if the transaction breaks down.
One possible option for regulators would be to enforce Vodafone to open its cable networks to competition. This type of regulation was introduced in Belgium in 2011, where alternative providers are able to launch their own offerings of television or television combined with broadband internet via Telenet or VOO’s cable networks. ACM, the Dutch regulator, recently proposed introducing similar regulation in the Netherlands.
Vodafone’s acquisitions in Czech Republic, Hungary and Romania look more straightforward
Unlike in Germany, Vodafone does not already own any fixed network infrastructure in the Czech Republic, Hungary and Romania, nor does it have an existing pay TV proposition. As a result, IHS Markit does not expect Vodafone to face the same level of regulatory scrutiny in its acquisition of Liberty Global assets in Central and Eastern Europe compared with Germany.
In the Czech Republic, Vodafone is the smallest mobile network operator, with a 25% market share at the end of 2017. The acquisition of UPC would provide Vodafone with a 16% market share of fixed broadband households and a 36% share of pay TV households, which can be used for cross-selling mobile services. Vodafone acquiring UPC will leave T-Mobile Czech Republic as the only mobile-centric operator in the country, with incumbent operator O2 Czech Republic already having a sizeable converged base.
It is a relatively similar situation in Hungary, where Vodafone’s acquisition of Liberty Global’s assets will create a market with two operators owning both fixed and mobile networks. In recent years, T-Mobile's share of fixed broadband has been successfully eroded by Liberty Global’s UPC and, therefore, Vodafone’s acquisition of UPC would make it the largest fixed broadband provider in Hungary.
In comparison to the Czech Republic and Hungary, Liberty Global has a smaller holding in the Romanian market. However, Vodafone’s mobile market share, at 33%, is stronger in Romania than in the Czech Republic and Hungary. Nevertheless, previous M&A transactions involving fixed and mobile operators indicate that it is harder to cross-sell fixed broadband services to mobile customers than vice-versa. Therefore, the relatively larger amount of mobile customers in Romania may make it more difficult for Vodafone to form a large converged customer base in Romania than in the Czech Republic and Hungary.
The transaction excludes assets in the UK and Ireland, but an agreement in these countries remains viable
When Vodafone and Liberty Global confirmed M&A talks in February, it was made clear that negotiations involved only continental assets, ruling out overlapping operations in the UK and Ireland. Nevertheless, IHS Markit expects both Vodafone and Virgin Media to continue exploring strategic options in the UK. Vodafone still lacks the scale needed to be a converged operator in the UK, whereas Virgin Media requires mobile assets to execute a more comprehensive fixed-mobile convergence strategy, as Liberty Global focuses on scaling its operations in selected markets.