Vodafone cable mega-deal would be logical but pricey

LONDON: 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 EBITDA should top 13 billion pounds this year and gearing 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 US operator Verizon Wireless VZ.N>. Vodafone shareholders might balk at paying way above Vodafone's own beaten-down rating - no matter if that cable's premium valuation reflects more robust growth and predictable cashflows.

Vodafone's directors might be cautious too. Investors clashed with former Chairman John Bond over M&A missteps. And trustbusters 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.

CONTEXT NEWS

- Vodafone is considering a bid for German cable operator Kabel Deutschland, Reuters reported on Feb. 13, citing a person familiar with the matter. No final decision has been made at Vodafone about a formal offer, the person told Reuters. Vodafone and Kabel Deutschland declined to comment.

- Manager Magazin earlier reported that the head of Vodafone's German operations had put forward a plan to buy Kabel Deutschland to the British group's senior management.

 - Shares in Kabel Deutschland rose 8.8 percent to 69.17 euros a share. Vodafone shares declined 1.1 percent to 171.31 pence.