Liberty Global to Acquire Unitymedia for US$5.2 bil. in Germany

U.S.-based cable company Liberty Global says that it has agreed to acquire German cable operator Unitymedia from an investor group led by private-equity firms BC Partners and Apollo, for an equity purchase price of 2 billion euro. Including Unitymedia's net debt of 1.5 billion euro, the total consideration of the transaction is approximately 3.5 billion euro. Subject to normal regulatory approvals, the transaction is expected to occur in the first half of 2010.

Germany's second-largest cable operator, Unitymedia, reports that as of end-June 2009 its customer base comprised 6.315 million revenue generating unit (RGU)s, which included 4.554 million subscriptions for basic cable TV, 469,000 for digital pay TV, 496,000 for retail broadband, 307,000 for wholesale broadband, and 490,000 for fixed telephony. The company's network passed 8.744 million homes, 88% of which were upgraded to support broadband.

• The Exit Plan B for Selling Side: For the selling side, the divestment is a direct consequence of the German regulatory environment. The German cable sector's three leading firms—Kabel Deutschland, Unitymedia, and Kabel BW—had thought of merging for a long time, the rationale being that because of the regional nature of their networks they are in a disadvantaged position against nationally operating fixed-line telcos, particularly incumbent Deutsche Telekom (see Germany: 25 June 2009: German Federal Cartel Office Blocks Cableco Merger as BNA Warns of Broadband Monopolies). A merger was considered a way to achieve the same scale benefits and market potential enjoyed by the fixed-line sector, as well as a convenient exit for some of the private equity firms behind the cablecos which had become willing to divest their holdings because of debt liabilities. The existing anti-trust framework prevents large-scale cable mergers on competitive grounds, and although the local anti-trust authority had earlier agreed to assess implications of revising this, in June it confirmed that the conclusions did not support consolidation between all or any of the leading three. This, by turn, has now prompted the investors behind Unitymedia to opt for an alternative exit plan and divest their holding to Liberty Global. In the meantime, the biggest of the three, Kabel Deutschland, has indicated that is studying possibilities for a float in the stock market (see Germany: 31 July 2009: Kabel Deutschland Ready for IPO in Medium Term—CEO).
• Liberty Global Wins Crucial Scale Benefits: For the buyer, the acquisition means most of all a significant expansion in the European cable sector, where its footprint currently covers 17.8 million RGUs—out of a network of 16.6 million passed households—in a total of 10 countries. Although Unitymedia is present only in the German states of Hesse and North-Rhine Westphalia, it is worth noting that, being the most densely inhabited parts of the country, their combined population is around 24 million. By integrating Unitymedia's assets and addressable market to its existing operations, Liberty Global achieves significant scale benefits, which will represent a whole new level of purchasing power when the company will in future buy new network equipment for its units. As such, this is crucial because in the cable sector practically the only sustainable business model is increasingly based on the services delivered over broadband-capable infrastructure. Until now, the cable technology have generally given the cablecos a certain competitive edge against fixed-line operators in terms of the maximum speed of their broadband access, but with the telcos stepping up their fibre-optic deployments the cable-based competitors are pushed either to invest further or be taken over (see Germany: 22 October 2009: Unity Media to Launch 120 Mbps Broadband During November and Ireland: 9 November 2009: UPC Pledges US$134-mil. Broadband Investment).
• Busy Times in the German Broadband Space: In the German broadband market, this is the second billion-scale acquisition within a short time, following Telefónica's purchase of Hansenet last week and demonstrating further how M&A activity has returned to Europe's telecoms after being brought to a halt by the financial crisis (see Germany: 6 November 2009: Telefónica Buys Hansenet from Telecom Italia for 900 mil. Euro). Earlier this year, Freenet sold its DSL operations to United Internet in a deal what many regarded as something of a firesale. There may be more to come, with several reports that financial pressed Orion Cable might be up for grabs (see Germany: 24 September 2009: Owner Appoints Citigroup to Advise on Future of Orion Cable—Report), besides which the management of Versatel confirmed earlier this week that it would consider selling the retail side of its fixed-line and cable assets on an adequate offer. This is unsurprising, given that the fundamentals of the sector—on one hand the increasing investment requirements, on the other hand a steady price erosion—had made it rather ripe for consolidation even before the crisis. As such, the market structure is now catching up with the dynamics of competition.