FRANKFURT/LONDON Vodafone is facing pressure from Kabel Deutschland's largest shareholder to raise its 7.7 billion euro ($10.1 billion) offer for Germany's largest cable company, two sources familiar with the situation said.
Activist investor Paul E. Singer, founder of U.S. hedge fund Elliott Asset Management, more than doubled his stake to 10.9 percent on September 6, Kabel Deutschland said on Monday two days before shareholders have to decide whether to accept Vodafone's offer.
"Vodafone's offer is not ideal. The goal is to renegotiate terms," a person familiar with the hedge fund's thinking said.
A spokeswoman for Elliott, known for its battle for control of U.S. oil firm Hess Corporation earlier this year, declined to comment.
A person familiar with Vodafone said Elliott was building up its stake in an attempt to force a better deal.
Vodafone urged Kabel Deutschland shareholders to accept its 84.5 euro a share offer earlier on Monday and warned the bid would lapse if the holders of less than three quarters of the German company's shares agree to sell by Wednesday.
The British company, which last week agreed the sale of its share in U.S. operator Verizon Wireless for $130 billion, wants to buy Kabel Deutschland to offer more television and fixed-line services in Germany, its largest European mobile market.
If the deal were to collapse, Vodafone would have to rely on renting fixed lines from Deutsche Telekom, rather than owning its network. It also faces the risk of Kabel Deutschland becoming a competitor in mobile phones, analysts said.
"There will not be any additional acceptance period should the 75 percent acceptance condition not be met by Wednesday, 11 September," Vodafone said.
Another person familiar with the transaction said Elliott may not attempt to block the deal, but could try to extract a higher price once Vodafone owned at least 75 percent of Kabel Deutschland.
Under German law, once Vodafone crosses this threshold it would have to offer to buy out minority shareholders at the same price. At that point Elliott could sue Vodafone, a strategy it is pursuing at German crane maker Demag.
Investors in two other German companies - utility Mainova and HVB Real Estate Bank - used this tactic successfully to get more for their shares earlier this year.
Kabel Deutschland said on Monday that two other investors had raised their stakes in the firm. U.S. hedge fund Davidson Kempner Capital Management LLC increased its holding to 3.4 percent, while British bank Barclays upped its stake to just above 5 percent of voting rights from less than 3 percent.
Davidson Kempner is known for its strategy of betting on the success or failure of takeover offers, a tactic known as merger arbitrage, or "arb" trading.
Neither Davidson Kempner nor Barclays were immediately available to comment.
RISK OF FAILURE
Shares in Kabel Deutschland, which operates Germany's biggest cable network, closed down 0.6 percent on Monday at 85.22 euros.
Vodafone agreed the 84.5 euro a share, plus a 2.5 euro dividend, offer for Kabel Deutschland in June, a near 40 percent premium to Kabel's share price before the British company's interest first emerged.
Another one of Kabel Deutschland's 30 largest shareholders said on Monday he expected the deal to go through.
"Shareholders are unlikely to get a better deal for their shares in the next three to four years. Vodafone and Kabel D. can unlock high synergies from the joint utilization of networks and a counter-bid is unlikely," he said.
Espirito Santo analyst Andrew Hogley said there was a risk that the Kabel Deutschland deal would fail, although on balance he expected it would succeed.
"Kabel Deutschland on a standalone basis on our numbers is worth about 84 (euros), so it's a fair price that Vodafone is offering but given the synergies they are claiming from the deal, it is not compelling," he said.
Vodafone said on Monday that Germany's Federal Cartel Office had confirmed it would not request a referral from Europe on the deal.
It also said the European Commission was expected to complete an initial review of the offer by September 20.
Vodafone said that by Friday evening it had secured the support of holders of 11.86 percent of Kabel Deutschland, including 4.27 percent of the cable operator's shares Vodafone and a person that acts jointly with the group already owned.
In acquisitions, shareholders generally wait until the deadline to tender their shares in case a last-minute rival bid emerges.
($1 = 0.7600 euros)