Vodafone remains the best bet to buy Kabel Deutschland. The mobile giant has stronger finances than Liberty Global, the U.S. challenger. It would wring bigger savings from the German cable outfit, and may also irk regulators less. But the outcome depends on questions of strategy and financial discipline.
With its shares lifted by takeover speculation, Germany’s biggest cable operator is already worth more than 10 billion euros, including debt. Given the scale of the potential deal, Vodafone’s greater size and stronger balance sheet give it a distinct advantage: it could pay all in cash and still keep a decent investment-grade credit rating.
In contrast, debts at Liberty Global, which recently swallowed Virgin Media of Britain, already equate to a punchy 4.6 times Earnings before interest, taxes, depreciation and amortization, or Ebitda. A deal at 90 euros a share could require issuing $7 billion to $8 billion of equity, Jefferies reckons. Some of the vendors, meanwhile, might find payment in stock less alluring. That might require Liberty to pay more.
Secondly, bigger savings imply a higher pain threshold for Vodafone. Banco Espirito Santo, for example, reckons synergies could be worth 16 euros per Kabel Deutschland share for Vodafone, versus 8 to 10 euros a share for Liberty.
Finally, Liberty would probably also get a harder ride from Germany’s cartel office. While Liberty and Kabel serve different states within Germany, combining the country’s top and second-largest cable firms would create a powerful force in television distribution, for example. The authorities have several interlocking markets to consider, including broadband, cable, and television, and would! n’t necessarily give Vodafone a free pass either. But all else being equal, a Vodafone deal looks cleaner and thus more attractive to Kabel Deutschland.
Still, the British suitor is not a dead cert winner. Vodafone shareholders will recall some troublesome big deals, and could urge moderation. Conversely, John C. Malone, the cable mogul behind Liberty Global, might have a rosier view on the long-term future of European cable. If so he might value Kabel Deutschland more highly than others. And with strong national footprints in key European markets, Liberty Global could one day itself be an attractive target for Vodafone.
Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
