John Malone, the US billionaire who controls European cable company Liberty Global, once described a merger with Vodafone as like trying to take a “big banana” out of a jar. So news this morning that Vodafone has reached an €18.4bn deal to buy several of Liberty Global’s European businesses raises many questions. For example, does this represent a loosening of the figurative lid on the figurative jar? Will notoriously unbending European regulators allow the shape of this figurative plantain proposition? And where on earth does John Malone buy - or store - his actual fruit? Has he not heard of bowls?
As first reported by the Financial Times, the deal that Vodafone and Mr Malone just announced- or unscrewed - involves the UK company buying Liberty’s German cable group Unitymedia and three smaller eastern European assets, in the Czech Republic, Hungary and Romania.
Vodafone’s press release says that this will make it “the leading next generation network owner in Europe”, with 54m cable/fibre homes “on-net” reaching 110m homes and businesses.
That should certainly satisfy Vodafone’s appetite for expansion in continental Europe, and competing more directly with Deutsche Telekom, which is the region’s leading operator through its T-Mobile brand. European telecoms companies have been forced to spend billions of euros to upgrade networks to full fibre and 5G networks, which has driven the need for greater scale.
At the same time, there are tasty looking financial benefits. Vodafone estimates the cost and capex synergies at approximately €535m per year before integration costs, by the fifth year after deal completion. That is an estimated net present value of over €6bn after integration costs.
For this, it is paying 10.9 times earnings before interest, tax, depreciation and amortisation - and before allowing for those synergies. Vodafone will pay for the acquisition using existing cash, new debt facilities (including hybrid debt securities) and around €3bn of convertible bonds.
Liberty will be left with a reduced, er, fruit salad of European assets, including Virgin Media in the UK and a joint venture with Vodafone in the Netherlands.
And this menu choice would seem to have been driven by Mr Malone’s distaste for the fragmentation of the European telecoms market. Liberty Global agreed to sell its Austrian business to Deutsche Telekom for €1.9bn in December and is also considering the sale of its Swiss unit.
But the deal is likely to be subject to intense regulatory scrutiny that could yet squash Vodafone’s plans. In Germany, in particular, Vodafone’s purchase of Unitymedia is likely to be opposed by Deutsche Telekom and German broadcasters. Although Vodafone’s existing cable business does not overlap with Unitymedia, the combined companies would have a bigger slice of the German market.
Regulatory concerns have not put a kink in big telecoms deals elsewhere, however. Last week, Deutsche Telekom’s T-Mobile USA agreed a takeover of close rival Sprint, owned by Japan’s SoftBank. Domestic US telecoms and cable operators AT&T and Comcast are also pursuing acquisitions to add content to their platforms and expand their distribution.
Cigarettes are altogether easier to remove from their containers, probably owing to the absence of awkward curves in their design. Clever, that. So might deals involving Imperial Brands prove as easy?
According to a story in last weekend’s Sunday Times, the tobacco company has been considering its “strategic options” after coming under pressure from investors to revive its flagging fortunes. Apparently, chief executive Alison Cooper has been told to come up with a fresh plan to reverse a 30 per cent decline in its share price over the past year. “City sources” said some investors had demanded it think about a sale of some or all of the business to a rival, such as Japan Tobacco.
So it was perhaps not surprising that the FTSE 100 group’s half year results this morning refer to “capital reallocation opportunities, targeting proceeds of up to £2bn”.
Ms Cooper hinted that old fashioned cigarette operations would be the ones to go, as the company focuses on next generation products - or NGP - such as e-cigarettes and heated tobacco.
“In NGP, our product and market launches are on track. Myblu is generating positive trade and consumer feedback and we continue to invest in developing our pipeline of proprietary innovations, including heated tobacco, to enhance the consumer experience and realise our growth ambitions. As we sharpen our focus on the brands, products and markets that are central to our strategy, we are progressing opportunities for divestments, initially targeting proceeds of up to £2 billion within the next 12-24 months. This will further simplify the business, enhance performance and release capital to pay down debt, deliver returns to our shareholders and, where appropriate, invest in our growth agenda."
She needs to do something. Although total tobacco volumes continued to outperform the industry in the period, and so-called “growth brands” increased their volumes organically by 1.6 per cent - lifting market share - revenue and profit fell again.
Revenue dipped 0.1 per cent to £14.3bn, while operating profit fell 7.6 per cent to £833m - reflecting a £160m one-off cost from the collapse and administration of UK cigarette distributor Palmer & Harvey
Still, the group insisted it was on track to deliver on full-year expectations. This was in line with what it said at its AGM statement, when it advised that full year revenue and profit guidance would be met - but delivery would be weighted towards the second half.
And, finally, it seems Mr Malone is not the only one having trouble with a few jars. Pub group JD Wetherspoon has just reported that its sales growth is slowing. Like-for like sales rose 3.5 per cent in the in the third quarter of its financial year but the way that bank holidays fell reduced the rate of growth by 0.5 percentage points.
In January, Wetherspoons reported like for like sales growth of 6 per cent for its second quarter. At the time, it warned that “in the second half of the year, sales comparatives will be more difficult.”
Wetherspoons on Wednesday also reiterated that it faces “significant cost increases in the second half in areas which include labour, business rates and the sugar tax.”
Today’s Lombard column focuses on Standard Life Aberdeen’s heartbreak over losing Lloyds’ business.
Standard Life Aberdeen’s refusal to accept that a £109bn asset management contract with Lloyds Banking Group can be terminated has all the hallmarks of messy break-up.
Dear Lombard agony column,
I’m a fund manager from Aberdeen and I’ve been having a relationship with a banker from London — let’s call him Lloyd, to protect his identity. Since our first man-date in 2013, we’ve been enjoying a four-year love affair. But, in February, Lloyd said it was over, claiming I was too competitive, and claiming custody of the money he gave me to look after. I don’t consider that Lloyd has the right to terminate our arrangement like that. Lloyd, however, is already seeing other fund managers: he admits to taking it to the next level with several of them.
Yours truly, Stan of Aberdeen
Read the rest of today’s Lombard column here.
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