Vodafone buys Kabel Deutschland
June 24, 2013
Vodafone is making an agreed public tender offer for 100 per cent of the share capital of Kabel Deutschland.
Vodafone intends to deliver Kabel Deutschland shareholders a total value of €87 in cash for each share comprising €84.50 per share in cash pursuant to the voluntary public tender offer plus the payment of the €2.50 dividend per share announced by Kabel Deutschland on 20 February 20132. The Transaction values the entire fully diluted ordinary share capital of Kabel Deutschland at €7.7 billion (£6.6 billion) and represents a total enterprise value of €10.7 billion (£9.1 billion) assuming €3.0 billion (£2.5 billion) adjusted net debt as at 31 March 2013.
Background to and reasons for the Offer
Highly attractive business with significant growth prospects. Kabel Deutschland has a high speed broadband enabled cable network with 15.3 million homes passed in 13 of Germany’s 16 federal states. As at 31 March 2013, Kabel Deutschland had 7.6 million total direct subscribers, of which approximately 60% were on long term contracts with housing associations. Through continued cross-selling and up-selling, Kabel Deutschland has delivered significant revenue and EBITDA growth of approximately 8% over the last twelve months. Kabel Deutschland’s subscriber base is still under penetrated with broadband and pay-TV penetration of only 16% and 12%, respectively3. These low penetration levels provide a significant opportunity for Kabel Deutschland’s strong and experienced management team to continue to deliver strong future growth.
Creates a leading integrated player in Vodafone’s largest European market. The acquisition of Kabel Deutschland is consistent with Vodafone’s stated market-by-market convergence strategy of wholesale, organic fibre deployment or M&A. Kabel Deutschland provides Vodafone with an attractive platform for TV and fixed broadband in Germany and creates a leading integrated operator with pro forma revenues of approximately €11.5 billion (£9.8 billion). Leveraging Kabel Deutschland’s high speed broadband and TV capabilities will provide Vodafone with the ability to offer premium unified communications services to consumers and businesses in Germany.
Vodafone’s and Kabel Deutschland’s network infrastructures are highly complementary. Vodafone intends to migrate its existing fixed line DSL customer base to Kabel Deutschland’s cable network where possible, generating savings from closing down DSL central offices, reduced maintenance costs and removing the need to pay unbundled local loop (“ULL”) and bitstream fees. Outside Kabel Deutschland’s footprint, Vodafone will continue to offer fixed broadband access to consumer and business customers via DSL or via its recently announced VDSL bitstream agreement with Deutsche Telekom. Vodafone’s mobile business will benefit from Kabel Deutschland’s network, which will provide transmission capacity for Vodafone’s base stations at considerably lower cost than prevailing market rates for leased capacity. There is also scope for savings by combining overlapping regional and national backbones.4
In-market consolidation with significant cost and capex savings. The in-market nature of the combination of Vodafone and Kabel Deutschland and the size of Vodafone’s business in Germany are expected to reduce execution risk on the delivery of synergies. The cost and capex savings will be predominantly derived from network integration, the reduction in ULL and bitstream fees, procurement efficiencies and IT/billing simplification. There will also be scope to reduce duplication in customer care and administrative functions. When combined, these savings are expected to equate to an annual run-rate by the fourth full year post completion exceeding €300 million (£260 million) before integration costs, equivalent to a net present value exceeding €3.0 billion (£2.6 billion) after integration costs.4
Significant potential to accelerate the growth of the combined business. The acquisition of Kabel Deutschland means Vodafone has a significant opportunity to use its leading brand, extensive distribution network and scale to accelerate the growth in Kabel Deutschland’s business and cross-sell Kabel Deutschland’s high quality fixed broadband, fixed telephony and TV offerings to Vodafone’s existing customers. Vodafone also expects to be able to cross sell its mobile services to Kabel Deutschland’s customers and offer new services, using both companies’ product sets and networks. Therefore, Vodafone believes that there is significant upside potential from revenue synergies, including a net present value exceeding €1.5 billion (£1.3 billion) from cross-selling and improved customer loyalty4.
Value accretive transaction. The Transaction values Kabel Deutschland at a multiple of 13.8x FY2014 OpFCF based on consensus forecasts, adjusted for Kabel Deutschland’s pull forward capex programme (Project Alpha) and run-rate cost and capex synergies before integration costs1. The Transaction comfortably meets Vodafone’s M&A criteria, including all synergies, and is expected to be accretive to Vodafone’s EPS and FCF per share from the first and second full year post completion respectively, after cost and capex synergies and before integration costs (which are expected to total €300 million in the first four years).
Commenting on the Transaction Vodafone Group Chief Executive Vittorio Colao said: “German consumer and business demand for fast broadband and data services continues to grow substantially as customers increasingly access TV, fixed and mobile broadband services from multiple devices in the home and workplace and on the move. The combination of Vodafone Germany and Kabel Deutschland will greatly enhance our offerings in response to those needs and is consistent with Vodafone’s broader strategy of providing unified communications services. The transaction announced today – which the Management and Supervisory Boards of Kabel Deutschland intend to recommend to their shareholders – will lead to the creation of an operator with significant competitive scale, attractive operating and capital investment efficiencies and a combined management team with expertise across all communications segments and technologies. We look forward to welcoming the people of Kabel Deutschland to Vodafone and to working together to build an advanced unified communications provider to serve customers across Germany.”
Kabel Deutschland management and employees
Vodafone’s intention is that Kabel Deutschland’s management will be responsible for the combined consumer fixed line business throughout Germany and for creating the single product platforms for TV, broadband and fixed telephony, as well as forming the basis for increased operational excellence for high speed broadband and TV across the broader Vodafone Group. Vodafone intends to maintain Kabel Deutschland’s headquarters in Unterföhring and believes that Kabel Deutschland employees and management will benefit from enhanced career opportunities across the wider Vodafone Group. Kabel Deutschland’s CEO will be invited to join the Management Board of Vodafone Germany.
Kabel Deutschland Board support
The Management and Supervisory Boards of Kabel Deutschland welcome the Transaction. Subject to their review of the formal Offer Document, the Management and Supervisory Boards intend to recommend Kabel Deutschland shareholders accept the Offer, and the Management Board members intend to accept the Offer in respect of their entire beneficial shareholdings.
Commenting on the Transaction Kabel Deutschland CEO Dr. Adrian v. Hammerstein said:“Kabel Deutschland has evolved into one of the most dynamic players in the sector. Its high-performance infrastructure and successful strategy makes it ideally placed to continue returning above-average growth in a rapidly changing market. Kabel Deutschland and Vodafone are an ideal fit. Together, we have the opportunity to become Germany’s leading telecommunications and television provider and to create what for the German market is a unique, winning combination of fixed line and mobile communications.”
Vodafone intends to make the Offer through Vodafone Vierte Verwaltungsgesellschaft mbH, its wholly-owned subsidiary registered in Germany. Vodafone will finance the Offer from its existing cash resources and committed but undrawn bank facilities. Pro forma for the Transaction and the receipt of the US$3.2 billion Verizon Wireless dividend announced on 14 May 2013, Vodafone’s FY2013 net debt/EBITDA is expected to increase from 2.0x to 2.4x.
Business Combination Agreement
In a Business Combination Agreement (“BCA”), Vodafone and Kabel Deutschland have outlined key parameters which will facilitate the Transaction and the combination of Kabel Deutschland and Vodafone’s German operations. Amongst other things, Kabel Deutschland has agreed to a non-solicitation obligation, provided Vodafone with a matching right in the event of a competing offer and agreed to co-operate with Vodafone in relation to securing merger control approvals. The parties have also agreed on the guiding principles in relation to integration of Kabel Deutschland into Vodafone’s operations. Vodafone has also confirmed its intention to respect the rights of employees, works councils and unions. Further details on the BCA will be included in the Offer Document.
Additional information on Kabel Deutschland and the Offer
For the twelve months ended 31 March 2013, Kabel Deutschland reported net revenues of approximately €1,830 million (£1,562 million), EBITDA of approximately €862 million (£736 million), operating profits of approximately €426 million (£364 million) and profit before tax of approximately €226 million (£193 million). As at 31 March 2013, Kabel Deutschland reported gross assets of approximately €2,859 million (£2,440 million).
The Offer will be made subject to customary terms and conditions, including regulatory clearances by the appropriate authorities and a minimum acceptance threshold of 75%, to be set out in the Offer Document which is subject to the approval of BaFin. The Offer Document, as well as any further information with regards to the Offer, will be made available to investors and the market on Vodafone Group’s website under www.vodafone.com/investor.
Goldman Sachs International and UBS are acting as financial advisers to Vodafone Group.