* Vodafone talking to bankers on Kabel D deal- sources
* Mobile-centred strategy leaves Vodafone isolated
* Squeezed between cheap mobile discounters, incumbents
* All-included fixed, mobile plans grow in popularity
By Leila Abboud and Paul Sandle
PARIS/LONDON, Feb 18 Vodafone's interest in
Germany's biggest cable company Kabel Deutschland
could foreshadow more fixed network acquisitions, notably in
Spain, as it tries to keep up with tightening competition in
The reason: Vodafone is facing a squeeze between
low-cost mobile challengers and telecom and cable rivals
increasingly pushing discounted, all-included mobile and fixed
bundles to keep customers.
The trends are playing out at different speeds in Vodafone's
operations in Spain, Germany, the Netherlands and Italy, and
over time are expected to push down profits in its core mobile
business and force it to offer bundles of its own by renting
capacity on rivals' broadband networks.
Buying its own fixed assets such as local cable operators or
alternative telecom providers would help it keep up with
competitors' offers and cut fees paid for fixed access.
To date, Vodafone, which unlike its main rivals has largely
mobile operations in continental Europe, has pursued a modest,
country-by-country approach to buying fixed assets and otherwise
rented access to reach consumers' homes and businesses.
It paid $2.2 billion last year for Cable and Wireless
Worldwide in Britain and Telstra in New Zealand and also looked
at buying Kabel Deutschland before it went public in 2010.
But Vodafone may be forced into bolder action if results
start to suffer from what Goldman Sachs analysts have called a
"structural squeeze on mobile-only operators".
Liberty Global's surprise move into Britain with a
$15.75 billion bid for Virgin Media on Feb. 6 also
shows the perils of waiting; with limited assets up for grabs
and deal financing easier to get since the beginning of the
year, others might beat Vodafone to the punch.
With a stronger balance sheet than rivals and stable credit
ratings, it can afford acquisitions, though shareholders are
wary of a return to its free-spending past.
Analysts have also speculated that Vodafone could sell part
of its 45 percent stake in U.S. market leader Verizon Wireless,
worth roughly £57 billion after taxes, to fund cable deals in
Europe that Goldman Sachs says could deliver synergies with a
net present value of £10-16 billion.
Vodafone declined to comment on its interest in Kabel
Deutschland. Sources familiar with the matter say Vodafone is
talking to banks to hire advisers but has made no firm decision
on a bid. It has worked with Goldman Sachs and UBS in the past.
The deal would add Kabel Deutschland's 8 million households
to Vodafone's 12 percent broadband market share in Germany and
reduce the fees it pays to rent access on Deutsche Telekom lines
- perhaps 200 million euros a year, according to one analyst.
With a price tag analysts put at 10 billion euros, it would be
Vodafone's biggest buy since entering India in 2007.
Vodafone's Chief Executive Vittorio Colao said on Feb. 7
that the group would consider acquisitions to keep up with
bundled offers from competitors, while lobbying for regulators
to create fairer terms to rent access on fixed networks.
"We will have dual strategies in most places. Clearly M&A,
as in the case of Telstra or Cable & Wireless, is on the cards,"
said Colao, referring to 2012 acquisitions. "We keep all
possible alternatives open."
A sector banker who has worked with the company in the past
said the market-by-market approach made sense: "The strategic
question is whether as a mobile operator you need to have fixed
broadband strategy and access to the customer, and the answer
really depends on the competitive and regulatory dynamics in
Robin Bienenstock of Bernstein Research thinks Vodafone
should be more aggressive on acquisitions in Spain and Germany
in particular because it was becoming harder there to position
itself against competitors.
In Spain, Telefonica is pushing all-included fixed and
mobile offers dubbed 'Fusion' that Vodafone can't replicate.
While in Germany Deutsche Telekom hasn't moved to
"quad-play" yet (broadband, fixed-line, TV and mobile), a mobile
price war is brewing after third-place mobile operator KPN
announced heavy discounts last week to gain share.
With Liberty Global and Kabel Deutschland winning more
broadband clients with faster and cheaper services, analysts say
Deutsche Telekom may soon have to offer all-included bundles to
differentiate itself. All of which would put Vodafone in a
squeeze in its biggest market in Europe.
Buying Kabel Deutschland would also blunt any move by
Germany's cable operators to move deeper into mobile services as
Belgium's Telenet has done.
"I think Vittorio Colao is damned if he does these deals,
and damned if he doesn't," said Bienenstock. "If he does, he'll
get slammed for buying at high prices; if he doesn't, he faces
structural risk and living in fear that Liberty or someone else
will buy up the targets he wants."
In Spain, where Vodafone is the second-largest mobile
operator behind Telefonica and ahead of France Telecom's Orange,
it could buy cable operator Ono or broadband specialist Jazztel.
It has 7.3 percent broadband market share, fifth spot, and
mostly rents access to the copper lines into people's homes from
Telefonica, but it has long complained to regulators that its
rival drags its feet on such connections.
Neither Ono or Jazztel are ideal targets, say analysts and
bankers. Private-equity backed Ono holds 14 percent market share
in broadband but its network, which reaches 80 percent of
households, needs big investment to boost speeds.
Jazztel also relies on Telefonica line rentals, so it might
not confer much benefit on Vodafone. A Jazztel spokeswoman
wasn't available for comment.
Private equity firms CCMP Capital Advisors, Providence
Equity Partners, and Thomas H. Lee Partners, each own 15 percent
of Ono. A spokeswoman for Ono declined to comment.
"I think no strategic decision has been made by Vodafone on
whether to invest in countries like Spain," said another banker.
"Buying the likes of Jazztel or Ono are possible options,
but they all have their own challenges and in the short term
there is no need to force a decision on this."
Vodafone is less likely to pursue deals in the Netherlands
and Italy, bankers said. In Italy, the incumbent Telecom Italia
is in talks with a state-owned investment fund to spin off its
own fixed network, leaving much in flux, and the main target
broadband provider Fastweb is now owned by Swisscom.
A move for Dutch cable operator Ziggo is unlikely given its
rich valuation and ongoing brutal competition in a market that
accounts for only 4 percent of Vodafone operating profit.