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Vodafone to Buy Kabel Deutschland

Zacks Equity Research

Leading wireless service provider, Vodafone Group Plc (VOD) has finally confirmed its takeover plans for Germany's biggest cable operator Kabel Deutschland Holding AG.  According to market reports, the company will stick to its revised €7.7 billion offer for Kabel Deutschland that surpasses Liberty Global Inc.’s (LBTYA) €7.5 billion bid.

We believe the multi-billion dollar acquisition would fortify Vodafone’s presence in the European telecommunication market. In addition, it will also strengthen its position against players with equal potential such as Liberty Globaland 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 Europeis 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 increasingly looking for markets, where they can increase share with bundled video, broadband, and telephone that warrants higher margin and lower churn rates.

But, 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 its 3.3 million customers in Germany with DSL services. 

Further, Vodafone’s efforts to bring its customers within one network infrastructure (DSL to LTE) through the deal would result in additional savings for the company 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 France Telecom (FTE) and Telecom Italia S.p.A. (TI) currently carries a Zacks Rank #3 (Hold).

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