In late March, US media giant Liberty Global finally announced it would buy number three cableco Kabel BW for E3.16bn, after weeks of speculation about Swedish private equity firm EQT’s favoured exit strategy. CVC, Hellman & Friedman, Apax, and leading…
In late March, US media giant Liberty Global finally announced it would buy number three cableco Kabel BW for E3.16bn, after weeks of speculation about Swedish private equity firm EQT’s favoured exit strategy.
CVC, Hellman & Friedman, Apax, and leading cableco Kabel Deutschland (KDG), had also been among the companies to express interest, with the first two reaching the final phase of bidding. But Kabel BW itself had announced in mid-March that it would seek an IPO, with BofA Merrill Lynch and RBS acting as joint bookrunners.
The domestic cable market has seen two very different exits in the last year. First, Unitymedia owners BC Partners and Apollo announced they would list the company, only to sell it at the last minute to Liberty. Then, Providence followed through on its plans to list KDG, raising E759m, after also examining the option of a sale. In EQT’s case, it ended with slightly more than the E3bn it had reportedly been seeking.
“It’s a good deal for EQT” said Heinz-Peter Labonte, a cable operator and chairman of FRK, a small-and-medium-sized cable operators association, as Kabel BW’s previous owners had paid E1.3bn in 2006.
The deal, with a purchase price multiple of about 8.1x Kabel BW’s 2011 EBIDTA under IFRS, is expected to close in Q2 2011, Liberty stated. It hired Goldman Sachs and Freshfields, while Kabel BW hired JP Morgan and Deutsche Bank.
The deal will be financed by a E2.25bn debt facility.
TelecomFinance has confirmed that if the deal fails to get regulatory approval, JPMorgan will own the business for a short period before exiting it.
Hurdles on the way Regulatory questions will be the main stumbling block, since Liberty would presumably merge Unitymedia and Kabel BW, the respective number two and number three players.
In the past, the Federal Cartel Office competition regulator told KDG it could not merge with Kabel BW or Unitymedia on anti-trust grounds. In 2002, Liberty itself was not allowed to buy incumbent Deutsche Telekom’s cable assets, which were sold off in regional blocks, some of which were KDG.
However, the Cartel Office’s main concern may not be Liberty’s increased regional footprint. According to Norbert Wimmer, a communications & media partner at White & Case, “one of the concerns the Cartel Office may have about the Liberty-Kabel BW deal is vertical integration. This transaction would indeed mark another step in the combination of TV and telecom services. Liberty may be required to sell some entities and secure non-discrimination of other content providers.
“Content providers, like broadcasters, are likely to stress the risk of a further strengthening of the market power of cable operators. However, generally speaking, we are watching the emergence of a pan-European structure in both the telecom and cable industries. Through this transaction, Liberty may add to its negotiation power against content providers in Germany but also in Europe.” A source was reportedly quoted saying that Liberty may consider lowering slightly the feed-in fees paid by broadcasters to access Kabel BW’s network.
For the deal to get the green light, “Liberty will have to make sure it gives reasonable access to TV networks and other service providers,” said Michael Jürgen Werner, a competition, regulatory and EC partner at Norton Rose Brussels. He added that Liberty will also need to ensure there is sufficient investment in the network to encourage technological progress.
Experts in the industry remain divided about the outcome of the regulatory review by the European Commission and the Cartel Office, with some strongly expecting the deal to be blocked, while others, including Werner, say it will likely be approved as long as Liberty agrees to certain conditions.
According to Wimmer, “Brussels may more easily give the green light to the transaction, whereas Bonn may decide to stick to traditional market definitions and market analysis and therefore block it, like in former cases.” But most agree that public and private broadcasters as well as other telcos like Deutsche Telekom may be involved in the review. Small and medium sized cable operators will also examine how things develop for Liberty, said Labonte.
What’s next?
If the deal is approved, “we can expect Liberty to try and buy KDG. It would be a much bigger acquisition than that of Kabel BW and would be highly leveraged. But the situation would be quite similar to what happened in the UK with the merger of NTL and Telewest to create Virgin Media,” said Andrew Hogley, analyst at Espirito Santo Investment Bank.
Liberty’s ambitions are not limited to Germany (see page 10). “There are other markets, such as the Netherlands, where consolidation would make sense. Liberty already owns UPC there, and Ziggo’s owners are looking for an exit. So strategically, a deal would be possible. But from a financial point of view, there might be some issues,” explained Hogley.
According to Wimmer, Liberty’s pan-European strategy may also meet cultural difficulties. “Creating synergies might prove more difficult than expected. While it makes sense to have a pan-European business from a telecom point of view, notably in terms of procurement and licences, it is more difficult from a content perspective. Content not only has an economic aspect, but must also meet cultural expectations of the audience. TV content is not easy to be exported as programmes are still very much national to date.” So far, it remains unclear how long it will take for the Kabel BW-Liberty deal to be reviewed. But in an email to TelecomFinance at the end of March, the Cartel Office said it had yet to be notified about the deal, and that it had not yet been decided whether the European Commission or the Cartel Office would examine it.
