John Malone’s Liberty Global is contemplating a greater push into the German cable market, eyeing a combination with that country’s largest cable operator to create a 15 millionsubscriber powerhouse that could dominate the landscape.
Several reports last week, following an item in German monthly Manager Magazin, said that Liberty Global CEO Mike Fries was in talks with Kabel Deutschland officials about a possible deal. The largest cable operator in Germany with about 8.5 million customers, Kabel Deutschland has unofficially been on the block for months, after reports surfaced that U.K. mobile telephone giant Vodafone was in talks with the cable giant in February.
Liberty Global declined to comment.
As the second largest cable operator in Germany with 7 million subscribers, Liberty Global could face some tough regulatory hurdles in a Kabel Deutschland deal. The company has been open about its desire to own the German asset, though.
ANOTHER TRY
Liberty launched its first bid to dominate the German cable landscape in 2001, when it attempted to buy Kabel Deutschland’s predecessor company, Deutsche Telekom. The Bundeskartellamt, Germany’s top regulatory agency, responded by blocking the deal and forcing DT to break up into three separate parts — Unity Media, Kabel BW and Kabel Deutschland. Liberty made a play for Kabel Deutschland, the bigger of the three MSOs, in 2010, but the cabler opted to conduct an initial public offering instead.
Later that year, Liberty Global purchased Unity Media for $5.2 billion and in 2011 purchased Kabel BW for about $4 billion, combining the two to form Unitymedia KabelBW, the second-largest MSO in the country.
Wunderlich Securities analyst Matt Harrigan was skeptical that Liberty Global would be able to seriously pursue a deal, pointing to regulatory hurdles and the proximity to its $16.1 billion acquisition of Virgin Media in the U.K.
Harrigan said that German regulators have been testy lately when it comes to competition — they blocked Kabel Deutschland’s attempt earlier this year to acquire the much smaller Tele- Columbus, saying a deal would turn the cable market into a duopoly and stifle competition. Tele-Columbus, which has about 1.7 million subscribers, remains an independent company.
Technically the European Union — which last week approved Liberty Global’s $16.1 billion acquisition of Virgin Media — could override German regulators, but Harrigan said that would be “unlikely.” The cost of a Kabel Deutschland dea l could be prohibitive, he added, given that its leverage ratio is not expected to get down to 4.5 times cash flow until 2014.
“They would have to issue a lot of equity,” Harrigan said.
SQUEEZING VODAFONE
But some see the deal as a possibility. According to Bloomberg, Sanford Bernstein U.K. telecom analyst Robin Bienenstock wrote that a Kabel Deutschland play would be in line with Liberty Global’s existing strategy, adding that a deal “would put Vodafone under more pressure and reduce their optionality in Germany.”
Vodafone has said it wants to acquire assets that will allow it to offer a bundle of Internet, wireless and landline services across Europe. Reports citing unnamed sources said Vodafone held informal talks with Kabel Deutschland as recently as February.
Whatever the outcome, the speculation has benefi tted Kabel Deutschland’s stock, which rose nearly 9% from April 15 to April 17. Liberty Global shares dipped about 3% during the same period, from $75.54 on April 15 to $73.39 on April 17.
TAKEAWAY
Liberty Media could be close to a longstanding goal of consolidating Germany’s cable market.
