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Bidding war erupts around Kabel Deutschland

Kabel Deutschland, Germany’s largest cable operator, is Europe’s latest major pay TV asset up for grabs as Liberty Global joins UK owned cellular and telephony group Vodafone in a battle for ownership.

Yet, unless a third party joins in, the likely outcome is that Vodafone will end up taking the prize because Bundeskartellamt, the German cartel regulator, will almost certainly block a Liberty Global takeover on the grounds this would give it a near monopoly over the country’s cable sector. This has led some analysts to accuse Liberty Global of cynically forcing Vodafone to pay a higher price than it otherwise would, although there is no law preventing a company bidding just because it is likely to receive regulatory opposition.

Even so, this unusual situation means that Vodafone probably has merely to match any price offered by Liberty Global rather than exceed it, since Kabel Deutschland would rather accept an offer that would avoid regulatory intervention and therefore months of damaging uncertainty. At time of this writing, both companies had bids on the table of €7.5 billion.

The stakes are particularly high for Vodafone because, while Telcos and cable operators are having some success getting into mobile communications, most recently by establishing Wi-Fi hot spot networks, big players in the mobile space have found it hard going the other way. Acquiring Kabel Deutschland would, at a stroke, give Vodafone 8.5 million pay TV customers and a huge fixed-line presence in Europe’s largest market for broadband services. It would be well-placed to sell double, triple and even quad play bundles since it has 32 million German mobile subscribers.

It would also be a big deal for Liberty Global if it won the battle, since it would become clearly the world’s biggest cable company ahead of Comcast, with a total around 30 million subscribers. It would be a dominant force in German pay TV, which is growing fast, while other big European markets are either flat, as in the UK and France, or declining, as in Spain and Italy.

Furthermore, although competition approval at present looks unlikely, Liberty Global’s CEO Mike Fries has been lobbying hard with the argument that it is inconsistent for the former incumbent Telco Deutsche Telekom to be allowed a monopoly of DSL broadband communications while denying the same to the cable sector. While this may be a historical reality, Fries argues that as cable and traditional Telco communications converge it is no longer logical or fair to distinguish between the two. This argument, though, is unlikely to prevail or receive statutory backing at a European level over the timeframe of the Kabel Deutschland bidding process.

Liberty Global has only just finally completed its takeover of the UK’s dominant cable operator Virgin Media for £15 billion ($ 23 billion). With 3.7 million subscribers this is considerably more expensive than Kabel Deutschland would be on a price-per-customer basis, reflecting Virgin Media’s higher ARPU. A lot of Kabel Deutschland’s 8.5 million subscribers are on fairly low price packages. In fact only one third of its customers are direct, with the rest in large apartment units owned by cable service companies or housing associations.