Most observers think Vodafone, fortified with cash from the sale of its stake in Verizon Wireless, will be an early mover in an expected wave of mergers in the European communications business.
In fact, Vodafone already is in the midst of a deal to boost its position in Germany, Europe's largest communications market, by trying to buy cable operator Kabel Deutschland.
The Vodafone bid to buy Kabel Deutschland might face a new hurdle, though. The issue is that 75 percent of Kabel Deutschland shareholders must tender their shares in a first part of a two-stage tender process by midnight Sept. 11, 2013, and some shareholders already are saying they will not do so.
Vodafone is offering a total of 87 euros ($114) per share in the deal, estimated to be worth about 10 billion euros. If Vodafone does not raise its offer, and the bid fails, Vodafone would not be able to submit another bid for 12 months.
Of course, the anonymous expression of such fears sometimes is a tactic a major shareholder can use to try and coax better terms from a buyer. At least so far, Vodafone has said it will not raise its offer.
But much changes as bid deadlines near a close. Despite its public stance, Vodafone negotiators probably are considering what they can do.
It is not clear whether there is some way Vodafone can please some reluctant shareholders while not actually raising its bid.
Some might note that is precisely what SoftBank also said in its recent successful effort to acquire Sprint. What SoftBank finally decided to do raised returns for shareholders at the expense of Sprint’s working capital, without actually altering the total amount of the offer. In that case, though shareholders were able to wring a bit more out of SoftBank, those gains came at Sprint’s expense.
Even if Vodafone manages to secure the necessary shareholder votes, it would face significant regulatory hurdles in Germany, some believe.
Liberty Global earlier was unable to consolidate the German cable TV operator market due to resistance of the country’s Federal Cartel Office. A proposed merger between Unitymedia and Kabel BW in Germany was blocked by the German courts.
The alternative for Vodafone, should the Kabel Deutschland bid fail, is to build its own facilities, or perhaps buy other cable assets in Germany. Vodafone will have to consider infrastructure investment in any case, as no cable operator has national coverage, even if does win Kabel Deutschland.
Vodafone probably does not want to continue renting capacity from its competitor Deutsche Telekom.
Of course, Vodafone also could decide to invest elsewhere as well. In Spain there is Ono and in Italy Fastweb could be of interest. SFR in France, or TIM Brasil and GVT in Brazil.
In any event, the Vodafone bid is part of a growing wave of expected consolidations in the European communications market.
Some think Vodafone will wind up prey for another buyer. Either way, it is likely to be easier for European service providers to buy and sell each other sometime in 2014.
One speech does not a policy make, but European Community officials continue to plow ahead with plans to create a more-unified “single” telecom market within the EC region, on the model used for a unified market for trade, though many important details remain unsettled.
It isn’t yet clear, for example, how regulatory authority will work. Some think a single EC telecom regulator is required, though that does not seem to be in the offing, immediately. Others say there is no way 28 national regulatory bodies will cede their authority, so pushing for a change that drastic would certainly fail.
Nor is it clear how EC goals of reducing roaming costs will be achieved. Mandatory reductions already have been enforced, but there is some confusion about whether policies to reduce tariffs further ultimately will be enforced by regulatory fiat, or whether there are other mechanisms to achieve those results.
EC officials probably will insist on such continued rate reductions. But service providers are sure to continue resisting such reductions. And it remains unclear whether the proposed rules will include roaming rate reductions.
There has been concern that the big reductions in wholesale rates, intended as a way of encouraging the creation of a single EC communications market, would further depress service provider revenues and so hinder investment in next-generation networks.
Service providers were concerned, among other things, about the opportunity for arbitrage opportunities. That typically happens in communications when there is a wide disparity between wholesale rates and retail rates in any market.
Some had estimated that as much as £7 billion a year could be earned by wholesalers taking advantage of the rate spread. Such arbitrage discourages investment in facilities on the part of incumbents and over the top or wholesale-based competitors as well.
Analysts at Bernstein Research had estimated the rate reduction proposals would allow non-facilities-based rivals to undercut major network operators by between zero and 65 per cent, depending on prices in each country.
The biggest potential impact, they say, would be in some of Europe’s biggest markets, Bernstein Research argued.
“We need to extend the same formula to other areas: mobility, communications, energy, finance and e-commerce, to name but a few,” said José Manuel Durão Barroso, European Commission president.
“We will formally adopt a proposal that gives a push towards a single market for telecoms,” Barroso said. “Isn't it a paradox that we have an internal market for goods but when it comes to digital market we have 28 national markets?”
For European service providers, perhaps the biggest issue, aside from the possibility of drastically lower roaming revenues, is whether the “single market” will extend to a single market for service providers, in terms of easier ability to merge and consolidate national entities.
Many would argue that European service providers are experiencing financial difficulties because their operations are too fragmented and lack scale. In principle, a single telecom regulatory framework could clear the way for relatively rapid consolidation that would improve operator finances.
