Vodafone and Liberty Global in a battle to acquire Kabel Deutschland

Vodafone faces a battle for Germany's largest cable company, Kabel Deutschland, although rival bidder Liberty Global of the United States has bigger regulatory and funding hurdles to overcome.

Liberty Global, which owns Unity Media, Germany's second biggest cable operator, joined the race on Tuesday. It tabled an 85 euro a share offer, according to a person familiar with the matter, days after the British mobile company said it was in talks about a deal.

Vodafone wants to buy Kabel Deutschland so that it can offer TV, fixed line and broadband to more of its mobile customers, while Liberty Global wants more consolidation in one of its best-performing markets. Vodafone offered about 81-82 euros a share in cash, sources said last week.

Shares in Kabel Deutschland closed 3.7 percent higher at 85.51 euros, valuing the group's equity at 7.56 billion euros.

A Liberty Global deal would be closely scrutinised by German anti-trust authorities because the combined company would control roughly 60 percent of the country's television market.

"Shareholders of Kabel Deutschland would have to consider the possibility that a potential Liberty offer faces a lengthy regulatory review with an uncertain outcome," wrote analysts from Jefferies in a note.

Liberty Global's chief financial officer Charles Bracken recognised the hurdle on June 12 when he told a Goldman Sachs cable conference that while the industrial logic for consolidation in Germany was compelling, regulatory opposition remained a significant barrier to any deal in the near future, according to a note from the bank.

Germany's competition regulator in February blocked Kabel Deutschland's bid to take over smaller Berlin-based cable group Telecolumbus for 618 million euros. In 2011, when Liberty bought KBW, a regional player in the German federal state of Baden-Wurttemberg, the regulatory review took nearly nine months.

A source familiar with the situation said Liberty has already talked to the German antitrust office to discuss the deal, but declined to elaborate. The deal may also get referred for review by the competition watchdog in Brussels, which reviews large deals in the European Union and those with potential regional importance.

In prior German cable deals, regulators required remedies like making it easier for housing associations to switch TV providers and ending encryption of digital free TV programmes.

Liberty Global customers in Germany are in the densely populated German state of North Rhine-Westphalia as well as in Hesse and Baden-Wuerttemberg, while Kabel Deutschland is active in the rest of Germany.

Liberty Global's Unity Media Kabel BW and Kabel Deutschland hold about 15 percent of the German broadband market. With cheaper prices and higher speeds, they have been winning customers from Deutsche Telekom, which still has more than 40 percent of the market.

Vodafone holds roughly 12 percent of the German broadband market, and rents wholesale capacity from Deutsche Telekom to provide the service to customers.

A source familiar with the situation said Kabel Deutschland had requested binding bids in two weeks.

The ability of the bidders to fund a deal would also be considered, the source added, pointing to concerns about Liberty's finances given its recent deal-making.

Liberty, which is owned by U.S. tycoon John Malone, bought Virgin Media in Britain for about $15.75 billion in February and a 13 percent stake in Ziggo in the Netherlands for 633 million euros in March.

For its part, Vodafone can finance the offer since its leverage is lower than telecom peers. But ratings agency Fitch said that the group would be downgraded by one notch if it acquired Kabel Deutschland without taking other measures to reduce debt.

Analysts also said on Wednesday that Liberty would be able to reap fewer synergies from buying Kabel Deutschland than Vodafone, possibly hurting the price the U.S. group could offer.

Will Draper, an analyst at Espirito Santo Investment Bank, said for Liberty Global costs could be saved in areas such as billing, customer care, brand, content and R&D that would be worth as much as 8-10 euros per Kabel Deutschland share.

For Vodafone, synergies would be 16 euros per Kabel Deutschland share, stemming from moving its broadband customers in the Kabel Deutschland area onto the cable infrastructure.

"Other benefits which are harder to quantify are the potential for cross selling services and the defence of its mobile business against the possibility of a strengthened MVNO (mobile virtual network operator) offer from Kabel Deutschland," he said.

Vodafone, Liberty Global and Kabel Deutschland declined to comment on Wednesday.

© Thomson Reuters 2013