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VOD Gets Large Kabel Deutschland Stake

Zacks Equity Research

Vodafone Group Plc (VOD) reportedly acquired 76.48% stakes in Germany’s largest cable network company, Kabel Deutschland Holding AG, for €7.7 billion ($10.21 billion).

We believe the multi-billion dollar acquisition would fortify Vodafone’s presence in the European telecommunication market. In addition, it will strengthen its position against players with equal potential such as Liberty Global (LBTYA) and Deutsche Telekom AG in Europe’s largest telecommunication market.

It is evident that the prospective acquisition would oust major players in the German wireline industry. Vodafone would then be an undisputed leader in wireline business with the biggest loaf of cable TV and broadband business in Deutsch land.

West Europe is experiencing growing demand for pay-TV services together with triple-play bundled services that combine basic cable TV and Internet. Telephone carriers like Vodafone are exploring markets, where they can increase share with bundled video, broadband and telephone that warrants higher margin and lower churn rates.

However, beyond this, Vodafone foresees significant cost synergies (approximately 300–500 million Euros) as it will not have to pay rentals for copper lines to Deutsche Telekom. Vodafone currently requires these copper lines to provide DSL services to its 3.3 million customers in Germany. 

Further, Vodafone’s efforts to bring its customers within one network infrastructure (DSL to LTE) through the deal would result in additional savings by curtailing expenses on network build outs.

However, we believe that the implementation of network conversion remains a long-term process and involves structural changes. Hence, in the near future, we expect the Kabel Deutschland deal, which comes with an existing set of network backhauls, to provide a good platform for offloading data traffic and resolving spectrum issues for Vodafone.

Vodafone, which operates in the European market with the likes of Orange (ORAN) and Telecom Italia S.p.A. (TI) currently carries a Zacks Rank #3 (Hold).

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