Liberty Global has agreed to sell its operations in Germany, Hungary, Romania and the Czech Republic to Vodafone for €19 billion ($22.7 billion) on a US GAAP basis, compared to €18.4 billion ($22 billion) on an EU-IFRS basis.
The transaction is subject to EC regulatory approval, which is expected to occur in mid-2019. Following its completion, Liberty Global will remain present in the UK, Ireland, Belgium, Switzerland, Poland and Slovakia. It will also retain a 50% stake in VodafoneZiggo, a joint venture in the Netherlands.
In April 2018, the long-expected plan by Vodafone to buy Liberty Global’s cable assets in Germany and parts of Eastern Europe was said to be in the final stages.
Commenting on the transaction, Liberty Global CEO Mike Fries said: “We have a rich history at Liberty Global of successfully developing and reshaping our business to drive innovation, advance customer services and create significant value for shareholders. This is one of those moments. The transaction appropriately values our core cable operations at a double digit OCF multiple and will deliver €10.6 billion ($12.7 billion) of estimated cash proceeds to Liberty Global. Plus, we will retain all cash generated from the four businesses through closing. In Germany alone, which we value at 12 times 2017 adjusted Segment OCF, we will have generated over six times our original investment, supported by exceptional operating performance over the last seven years during which we grew revenue 60% and OCF 82%.
“This is also an important and exciting transaction for our customers and employees. In each of these markets, the combination of Liberty Global and Vodafone’s businesses will transform the competitive landscape and bring a new level of convergence to customers. Now more than ever, Europe needs strong competition from scaled national challengers willing and able to invest in next-generation wireless, video and broadband services.
“Germany, for example, is dominated by one provider that controls over half the broadband market. As a result, innovation and investment lag other countries in Europe, impacting customer service, next-generation product deployment and broadband speeds. Even together, Liberty Global and Vodafone, whose cable networks don’t compete or overlap, will be half the size of the incumbent operator. It’s time to alter market dynamics by unleashing greater investment and competition.”
Vodafone Group CEO Vittorio Colao said: “This transaction will create the first truly converged pan-European champion of competition. It represents a step change in Europe’s transition to a Gigabit Society and a transformative combination for Vodafone that will generate significant value for shareholders. We are committed to accelerating and deepening investment in next generation mobile and fixed networks, building on Vodafone’s track record of ensuring that customers benefit from the choice of a strong and sustainable challenger to dominant incumbent operators. Vodafone will become Europe’s leading next generation network owner, serving the largest number of mobile customers and households across the EU.”
In Germany, the takeover of Unitymedia which serves the three federal states currently not covered by Vodafone’s footprint, will enable Vodafone to operate a nationwide cable network competing head-on with market leader Deutsche Telekom for fixed-line TV, broadband and telephony customers. However, there’s strong opposition from Deutsche Telekom whose CEO Tim Höttges considers the deal to be “totally unacceptable”. Cable operator association FRK recently called for open access to the combined network for competitors as one of the conditions to be imposed by regulators if approval is granted.
VPRT, the industry association of the German commercial broadcasters, also takes a critical view of the takeover. “This is not good news for German broadcasters. Ultimately, they are confronted with a massive shift in negotiating positions. The planned merger would create a cable giant dominating the German TV market,” said Hans Demmel, Chairman of VPRT and Managing Director of German news channel n-tv, adding that no channel currently distributed on cable would be able to survive without an agreement with the new operator.
Significantly, Vodafone will be acquiring the German business inclusive of its debt. As currently structured, upon closing, a change of control will be triggered with respect to Unitymedia’s debt, and lenders and bondholders will have an option to put their debt to Vodafone.
Liberty has also agreed to provide certain transitional services for a period of up to four years. These services principally comprise network and information technology-related functions. The annual charges will depend on the actual level of services required by Vodafone.
Starting in Q2 this year, Liberty expects to treat the assets being sold to Vodafone, as well as its Austrian business that is being sold to Deutsche Telekom, as discontinued operations for accounting purposes.
LionTree and Goldman Sachs are acting as Liberty’s financial advisers on the transaction.
