Vodafone/LG €18.4bn deal
May 9, 2018
By Colin Mann
In a transaction that it says accelerates its converged communications strategy through in-market consolidation in its largest market, Germany, and in its Central and Eastern European (CEE) markets, Vodafone has agreed to acquire Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for an enterprise value of €18.4 billion. This is expected to comprise approximately €10.8 billion of cash consideration paid to Liberty Global and €7.6 billion of existing Liberty debt, subject to completion adjustments.
The pair say the deal creates a converged national challenger to Deutsche Telekom, the dominant incumbent in Germany with the scale to accelerate achievement of the German government’s digital ambitions, bringing Gigabit connections to around 25 million German homes (62 per cent of total German households) by 2022. The combination of Vodafone and Unitymedia’s non-overlapping regional operations will establish a strong second national provider of digital infrastructure in the German market, building on Vodafone’s long track record in bringing sustainable and effective choice and competition to the German consumer and enterprise markets.
“This transaction will create the first truly converged pan-European champion of competition,” declared Vodafone Group Chief Executive Vittorio Colao. “It represents a step change in Europe’s transition to a Gigabit Society and a transformative combination for Vodafone that will generate significant value for shareholders. We are committed to accelerating and deepening investment in next generation mobile and fixed networks, building on Vodafone’s track record of ensuring that customers benefit from the choice of a strong and sustainable challenger to dominant incumbent operators. Vodafone will become Europe’s leading next generation network owner, serving the largest number of mobile customers and households across the EU.”
Liberty Global’s Unitymedia is the second largest cable operator in Germany with 13.0 million homes passed, of which 11.0 million are currently marketable, reaching 12 of the largest 20 cities in Germany. Unitymedia provides services to 7.2 million unique customers. UPC Czech and UPC Hungary are the largest cable operators in the Czech Republic and Hungary, with 1.5 and 1.8 million homes passed (33 per cent and 43 per cent of total households) respectively. UPC Romania is the second largest NGN operator in Romania, with 3.1 million homes passed (41 per cent of total households). Together, the three CEE companies provide services to 2.4 million unique customers.
After completion of the transaction, Liberty Global will continue to be Europe’s leading cable television and broadband provider, with consolidated operations in the United Kingdom, Ireland, Belgium, Switzerland, Poland and Slovakia. Together, these country operations reach 24 million homes, account for 26 million video, broadband and fixed-line telephony subscribers and 6 million mobile services. In addition, Liberty Global owns 50 per cent of VodafoneZiggo, a joint venture in the Netherlands with 4 million customers subscribing to 10 million fixed-line and 5 million mobile services.
Mike Fries, Chief Executive Officer of Liberty Global, commented: “We have a rich history at Liberty Global of successfully developing and reshaping our business to drive innovation, advance customer services and create significant value for shareholders. This is one of those moments. The transaction appropriately values our core cable operations at a double digit OCF multiple and will deliver €10.6 billion ($12.7 billion) of estimated cash proceeds to Liberty Global. Plus, we will retain all cash generated from the four businesses through closing. In Germany alone, which we value at 12 times 2017 adjusted Segment OCF, we will have generated over six times our original investment, supported by exceptional operating performance over the last seven years during which we grew revenue 60 per cent and OCF 82 per cent.
“This is also an important and exciting transaction for our customers and employees. In each of these markets, the combination of Liberty Global and Vodafone’s businesses will transform the competitive landscape and bring a new level of convergence to customers. Now more than ever, Europe needs strong competition from scaled national challengers willing and able to invest in next-generation wireless, video and broadband services.”
“Germany, for example, is dominated by one provider that controls over half the broadband market. As a result, innovation and investment lag other countries in Europe, impacting customer service, next-generation product deployment and broadband speeds. Even together, Liberty Global and Vodafone, whose cable networks don’t compete or overlap, will be half the size of the incumbent operator. It’s time to alter market dynamics by unleashing greater investment and competition.”
Given the time between signing and closing, the use of proceeds from the sale will be determined in due course and are expected to provide significant additional flexibility to optimise growth and shareholder returns. Of note, Vodafone will be acquiring the German business inclusive of its debt. As currently structured, upon closing, a change of control will be triggered with respect to Unitymedia’s debt, and lenders and bondholders will have an option to put their debt to Vodafone.
The Transaction will be subject to review by and approval from the European Commission. The Vodafone and Liberty Global businesses are highly complementary in each country. There is limited overlap and, therefore, no negative impact on competition resulting from the Transaction. In Germany, there is no geographic overlap between Vodafone’s cable network and Unitymedia’s cable network; the two companies operate their cable businesses in different parts of the country, and serve different customers. The pair suggest the combination of these complementary cable networks does not, therefore, reduce customer choice for TV or broadband. Customers (including housing associations) will continue to have a range of alternatives.
For TV, these include satellite (which accounts for the largest proportion of the TV segment of the German market), cable and broadband internet streaming/download offerings.
In the Czech Republic, Hungary and Romania, Vodafone is primarily active in the mobile segment of these markets and has no meaningful presence in each country’s fixed line or TV segments; Liberty Global is primarily a fixed line and TV operator with little or no mobile activities.
A break fee of €250 million will be payable by Vodafone, in certain circumstances, if the Transaction does not complete.
The Transaction is not subject to Vodafone or Liberty Global shareholder approvals.
Vodafone anticipates that completion will take place around the middle of calendar 2019.