AMSTERDAM/LONDON (Reuters) - Mobile telecoms network operator Vodafone (VOD.L) and cable company Liberty Global (LBTYA.O) have agreed to combine their Dutch operations to create a stronger package of TV, broadband Internet and mobile, aiming to better take on former incumbent KPN (KPN.AS).
Vodafone will pay 1 billion euros ($1.1 billion) cash to John Malone’s group to equalize their stakes in the venture, which will rank as the second-largest telecoms company after KPN in the Netherlands.
The Dutch venture is a local solution to a wider problem facing both companies - the increasing demand for converged services in Europe that former incumbents are often better placed to meet.
Vodafone and Liberty had been in talks about combining operations in as many as seven European markets last year. Those negotiations failed, but were resurrected this year only focused on the Netherlands. [nL8N15H3HB]
Vodafone Chief Executive Vittorio Colao said the Dutch venture was not a blueprint for similar deals, for example in Britain, where Liberty owns cable TV network Virgin Media.
“There is no read-through to a wider deal and it is not currently under consideration,” he told reporters on Tuesday. “Our strategy is an evolutionary strategy which has to be market by market.”
U.S.-based Liberty’s Ziggo is by far the largest cable TV operator in the Netherlands, while Vodafone is the second-biggest mobile network operator behind KPN. Colao said the combination would provide a strong alternative to KPN.
“We are stronger in mobile and in enterprise but we are reliant on wholesale access for fibre,” he said. “Ziggo has a nationwide cable and fibre network, scale in high-speed broadband and leadership in TV, but today is reliant on wholesale ... access on Vodafone’s network.”
Analysts at Citi said they saw the deal as positive for both sides, compared with taking no action, with Liberty gaining the most. “They have, for now, passed on the opportunity of combining the parent companies, a move that could have tapped into much greater synergies, and so risk disappointing some investors,” the bank said.
Shares in Vodafone were down 0.5 percent at 208.5 pence by 1035 GMT.
The tie-up will also create a stronger competitor to smaller players Tele2 (TEL2b.ST) and Deutsche Telekom (DTEGn.DE) unit T-Mobile. In the Netherlands Tele2 is attempting to scale up its operations, while Deutsche Telekom has been attempting to sell T-Mobile to private equity investors. [L8N15Q544]
Colao said neither company wanted to leave the Netherlands market so an equal joint venture was the solution. He acknowledged some other joint ventures in European telecoms had not endured, but said Vodafone successfully operated many such structures worldwide, including a JV with Hutchison in Australia.
The fact that the two companies’ Dutch operations were “highly complementary” boded well, he said, adding: “Is that a recipe for eternity? I don’t know ... But to be sure its a very stable and fruitful combination. Time will tell.”
The Dutch entity would have had 2015 sales of 4.41 billion euros and operating profit of roughly 1.9 billion, the companies said. [nBwcgx7X3a]
They said they would see savings of 280 million euros per year from the fifth year after the closing of the deal, which they expect towards the end of 2016.
Morgan Stanley, Robey Warshaw and UBS advised Vodafone, while Goldman Sachs and LionTree Advisors worked for Liberty.
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(This version of the story has been refiled to add comments by Vodafone, analysts; refiled to add link to related commentary)
Additional reporting by Ismail Shakil in Bengaluru; Editing by Dan Grebler and David Holmes