Reuters: Regulatory News: DEALTALK-Vodafone looks to fixed buys to escape mobile squeeze

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DEALTALK-Vodafone looks to fixed buys to escape mobile squeeze Feb 18th 2013, 17:51 Mon Feb 18, 2013 12:51pm EST * 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 (Reuters) - 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 Europe. 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 each market." 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. Link this Share this Digg this Email Reprints

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