Tie-up could challenge US and Chinese giants, but it faces fierce German opposition
Nic Fildes in London YESTERDAY
The US telecoms market is dominated by four companies, China’s by three. But Europe’s fragmented industry still has more than 100 local players.
The prospect of forging a European telecoms champion has been a dream for two decades of industry executives, billionaire investors and even the European Commission. While Europe’s largest carriers struggle to justify the massive investment on 5G networks, US and Chinese companies are racing ahead.
A blockbuster deal to create such a company could be at hand, however, as Vodafone closes in on a plan to buy Liberty Global’s German and eastern European cable networks. If it happens, the transaction is likely to be worth as much as €16.5bn including debt, making it the largest European telecoms deal in almost five years. It is in the final stages and could be agreed within the next two weeks, according to people with direct knowledge of the talks.
The tension spilled over in public in February when Tim Höttges, chief executive of Deutsche Telekom, declared he would fight the takeover.
“My perspective is this deal is very unlikely to get approval. I find it from a competitive perspective unacceptable,” he said. “The dominance in the TV market, combined with a telecommunication provider, is something I personally find very tricky for democracy.”
If Vodafone were to buy Unitymedia, Liberty’s cable network, he said, it would give it too much power over the German media sector and would leave consumers without much choice.
The comments were a red flag for Vittorio Colao, chief executive of Vodafone, who confronted Mr Höttges at a dinner for executives held at a telecoms trade show in Barcelona days later. “I told him he has made a big mistake,” the Italian said of the German’s intervention.
Mr Colao then hit out at his rival at a conference in March when he argued it was strange that the head of Europe’s largest telecoms company would be complaining about competition.
“Here you have Deutsche Telekom, which is the largest European telecoms company by market capitalisation, with the highest number of accesses into homes in the best and most important European market. In any way, it is a giant,” he said. “Using the expression ‘shutting down competition’ is something that if I were him, I would not do.”
Mr Höttges tried to calm tempers, tweeting that “the remark was not OK! Sorry! It slipped out!”
But in a classic example of how corporate ambitions and domestic politics can often collide in Europe, the stage has been set for a public battle between the two telecoms powerhouses vying for a central role in the future of European telecoms.
Vodafone and Deutsche Telekom are the two companies best placed to build a pan-European telecoms network capable of matching the scale of the likes of Verizon Wireless, AT&T, SoftBank and China Mobile. Along with Liberty Global, which is controlled by billionaire John Malone, the two groups have been among the most active companies in consolidating the European telecoms market in the past decade as the push toward convergence — offering customers broadband, mobile and pay-TV over the same network — has taken hold.
Deutsche Telekom, which owns the T-Mobile brand and is the region’s largest telecoms company, has a network that stretches from the Netherlands across central and eastern Europe to Greece. It is also the largest shareholder of BT in the UK, as well as the third-largest mobile phone company in the US.
Vodafone has bolstered its own European network with cable deals in Spain, Germany and the UK. The Unitymedia deal would mean 40 per cent of its profit came from Germany. Dhananjay Mirchandani, a Bernstein analyst and former manager at Vodafone Germany, says: “The nucleus of this deal is Germany. It skews Vodafone’s exposure to the German market, and it effectively becomes a German company with peripheral European assets.”
A tie-up between Mr Malone’s Liberty Global and Vodafone has been dubbed the “mother of all deals” by telecoms bankers, but a full merger has proved hard to negotiate. Mr Malone described the situation as like trying to get a “big banana” out of a jar. The two companies have never seen eye to eye on the value of their respective assets, with Mr Malone known to drive a hard bargain.
Talks over an asset swap failed in 2015, although the companies did strike a deal to merge in the Netherlands. That move was seen by investors and analysts as a test-case for further activity. So it proved with Vodafone and Liberty Global reopening talks in February.
Adam Fox-Rumley, an HSBC analyst, says there may finally be a conclusion to the long-running saga. “While this extended courtship has been ongoing, neither company has stood still,” he says.
Consolidation is seen as critical for Europe’s largest telecoms companies, which have struggled to cope with the decline of lucrative revenue sources including text message revenue, traditional landline calls and roaming in the past decade. That is the result of aggressive regulation introduced by the European Commission, as well as the emergence of technology companies such as Facebook and Apple that have introduced new communications tools.
Telecoms companies in the US, Japan and China have been subject to less onerous regulation and have much larger customer bases. That means they are more profitable and can justify the huge investment 5G networks require.
According to Etno, the trade body that represents the largest regional players, European businesses account for only 11 per cent of global telecoms sector profit, down from 36 per cent in 2006. The overall earnings of the European sector was €63bn in 2006, but has halved during the past decade.
That has provoked concern among the continent’s executives. With the valuation of the sector at a 15-year low, the struggle to convince investors to fund the installation of new 5G and full fibre broadband networks has become acute.
Vodafone is not the only acquisitive European group. Orange’s takeover of Jazztel in Spain, BT’s £12.5bn acquisition of EE in the UK, Tele2’s move on Com Hem in Sweden and Deutsche Telekom’s purchase of Tele2’s Dutch mobile network and Liberty’s Austrian cable business are all examples of the trend.
At this stage, the big concern for Vodafone shareholders is not the logic of the takeover, but the terms.
“Mr Malone is a very savvy trader of assets. If Vodafone is to attempt to prise an asset away from Liberty, the burden of risk associated with overpaying arguably sits with Vodafone shareholders. It is important to state that Liberty is not a forced seller,” says Mr Fox-Rumley.
But striking the right terms is only one of the battles for Vodafone: the bigger threat lies in German politics.
Deutsche is expected to lobby German politicians and the public against the deal. “They [Vodafone] face a real uphill battle,” says one person close to Deutsche Telekom’s thinking.
The key battleground will not, however, be traditional market share metrics: it will be German landlords.
The German market has a unique law called the Nebenkostenprivileg that means that a landlord can levy the charge of installing and maintaining cable television lines on a tenant whether they want it or not.
The law dates to the 1980s, when then chancellor Helmut Kohl allowed electricians and contractors to install and maintain cables into people’s homes with the costs passed on to the tenant if the property was being rented.
Deutsche Telekom says it is frozen out of supplying high-speed broadband because large housing associations, which already have deals with the regional cable players where they are forced to pay for the installation, are unlikely to pay for a separate broadband line. Some 11m German homes fall into that category.
Deutsche Telekom fears that a combined Vodafone-Unitymedia would thus dominate the pay-TV and broadband markets. “It is a real thorn in Deutsche’s side,” says Bernstein’s Mr Mirchandani.
Deutsche Telekom has an ally in its Spanish counterpart Telefónica, which controls the biggest mobile phone network in Germany under the O2 brand and is also concerned about the power that the cable tie-up would hand Vodafone, its rival in the mobile market.
Markus Haas, chief executive of Telefónica Deutschland, says: “Such a transaction would generate a monopoly in cable content distribution and a de facto duopoly in fixed infrastructure in Germany.” He calls for a “deep analysis” of the deal by regulators, who need to consider whether an approval for such a merger “could be granted at all”.
Another key battleground will concern which regulator has eventual authority over the deal. Competition lawyers say that if the deal is monitored in Germany, it will probably be rejected because the federal cartel office will focus on Nebenkostenprivileg and has been quick to block cable mergers in the past. Yet the inclusion of Liberty’s Hungarian, Czech and Romanian cable assets in the talks could mean that Brussels takes ownership of the probe which, lawyers say, would vastly increase Vodafone’s chances of success.
The European Commission has been comfortable with fixed-to-mobile telecoms consolidation in the past, with the Dutch market providing the litmus test. In 2014, Ziggo and Liberty Global’s UPC, two cable companies with little geographical overlap, combined to create a national player that was subsequently merged with Vodafone’s mobile business in the country. Both stages of the deal were cleared by Brussels.
Christoph Enaux, a partner at the law firm Greenberg Traurig who has advised on previous cable deals, says the commission is likely to conduct the review and that there is a “high probability” of approval.
However, Margrethe Vestager, the European commissioner in charge of competition, opposed mobile mergers in Denmark and the UK, where it vetoed the £10.25bn takeover of O2 by Three in 2016. Mobile-to-mobile consolidation ground to a halt after the decision.
If Brussels heeds Deutsche Telekom’s warnings about the German cable deal, then question marks will be raised over future transactions involving fixed and mobile network combinations. It would also dent the prospects of a European telecoms champion ever emerging.
The executives: Problem solvers versed in sector’s struggles
The fight for the German cable market could determine the future shape of European telecoms. But it will also go a long way towards defining the legacies of the two leading figures in the sector — Vodafone’s Vittorio Colao and Deutsche Telekom’s Tim Höttges.
“They are like warring brothers,” says one telecoms chief executive who has worked closely with them both.
Mr Colao has been in charge of Vodafone for nine years and his record has been defined by having to cope with difficult situations in France, Australia, the Netherlands, the US and India either by merging with rivals to stem losses or by selling out for lucrative sums. That has helped to offset growth in its core European heartland.
Having solved many of those problems, he wants to now go on the offensive. But Mr Höttges, who sits on the supervisory board of Bayern Munich, the dominant German football team, is preparing a crunching tackle on Mr Colao, the rangy cycling enthusiast.
Mr Höttges took over as chief executive of Europe’s largest telecoms company in 2014 and signed a five-year extension last month. He has also spent a lot of his time firefighting, having to turn around struggling assets in the Netherlands and Poland. In the US, T-Mobile USA has been transformed under his watch from a basket case to the fastest growing US network and now accounts for more than half of Deutsche Telekom’s overall value.
A successful deal to control Germany’s cable network could well be Mr Colao’s coup de grâce after a decade in charge — if he persuades regulators to approve the transaction and overcomes the defiance of Mr Höttges in his home market.
But another failure to land the Liberty prize would be humbling. It remains to be seen who has made what Mr Colao called the “big mistake”.