A 10 billion euro bid by Vodafone for Kabel Deutschland would be logical - and expensive. The revelation that the British mobile group is eyeing Germany’s biggest cable operator has understandably unnerved its shareholders. Cable companies are pricier than phone groups, and Vodafone’s deal-making record is patchy. Still, a deal would offer opportunities to cut costs and boost sales. Vodafone needs to be prepared to make the case.
On Feb. 12, Kabel Deutschland’s shares were worth about 5.6 billion euros. That suggests an enterprise value of about 10 billion euros ($13.4 billion), after adding a conventional 30 percent takeover premium and debt of 2.8 billion euros. That would be a big transaction - but clearly achievable for the mobile giant. Vodafone’s earnings before interest, taxes, depreciation and amortization, or Ebitda, should top 1 billion pounds this year and its debt load is comfortable.
The valuation discrepancy between the two companies is inconvenient. Kabel Deutschland trades at 8.7 times Ebitda, before any takeover premium. Vodafone trades at 5 times Ebitda, adjusting for a shareholding in the U.S. operator Verizon Wireless. Vodafone shareholders might balk at paying way above Vodafone’s own beaten-down rating â€" no matter if that cable’s premium valuation reflects more robust growth and predictable cash flows.
Vodafone’s directors might be cautious too. Investors clashed with its former chairman, John Bond, over merger missteps. And trust busters might object: Kabel Deutschland is itself still trying to win approval to buy a smaller rival.
The benefits, though, are clear. Switching customers from Arcor, the fixed-line service Vodafone! runs over Deutsche Telekom’s network, could be worth 1.25 billion euros, taxed and capitalised, say analysts at Jefferies. Vodafone could boost revenues too by selling more bundled services combining mobile, landline, broadband and television. Whether this “convergence†will happen is a divisive issue among telecoms executives. It seems to be taking off in some European markets - but isn’t in Germany yet.
There may be canny timing too: Vodafone’s interest comes as Kabel Deutschland arch-rival Liberty Global is tied up buying Britain’s Virgin Media and unlikely to counterbid. It would have been cheaper to do a deal when Kabel Deutschland floated three years ago. But a deal makes sense. It’s a shame then that Vodafone isn’t going into it with stronger credibility as a buyer.
Quentin Webb is a columnist for Reuters Breakingviews. or more independent commentary and analysis, visit breakingviews.com.
