Vodafone Group Plc (VOD) Chief Executive Officer Vittorio Colao’s three-year pursuit of Germany’s largest cable company -- codenamed “Project Knight” -- hung in the balance as his top advisers gathered last Friday at the Sofitel London Heathrow.
On the sidelines of the annual senior leadership meeting, Colao was in secret negotiations with Kabel Deutschland Holding AG (KD8) CEO Adrian von Hammerstein and his entourage, according to people familiar with the talks. The Germans controlled key territory for Vodafone’s growth, and that week U.S. billionaire John Malone’s Liberty Global Plc (LBTYA:US) had come in with his own offer.
At stake was more than the largest cable company in Europe’s biggest economy -- Kabel Deutschland would be central for either company’s plans for a continental phone, Internet and TV giant. Vodafone had matched Malone’s 85 euro-a-share ($111) offer and was considering trumping it, said the people, who asked not to be identified because talks were private.
Early Friday night, at the five-star hotel connecting directly to Heathrow’s terminals, Kabel Deutschland accepted an improved bid. Vodafone’s bump to 87 euros a share valued the company at 7.7 billion euros, making it the second-biggest telecommunications-network takeover in Europe this year.
Vodafone’s plan for Kabel Deutschland, revived in January after an aborted effort in 2010, still requires the approval of the German company’s shareholders and may yet be matched or trumped. Liberty believes a counter-offer is still feasible should it opt to table one, people familiar with the situation said. The company could decide as early as this week whether to walk away or make a counterbid, said one of the people.
Marcus Smith, a spokesman for Liberty Global, declined to comment on the likelihood of a counterbid. Vodafone spokesman Ben Padovan and Insa Calsow, a Kabel Deutschland spokeswoman, declined to comment on how the deal came together.
Since early June when Colao first called von Hammerstein to discuss a takeover, Vodafone raised its offer at least three times, from 80 euros to 83 euros, 85 euros and finally 87 euros, the people said. That represented a 37 percent premium on Kabel Deutschland’s Feb. 12 closing price, the day before Vodafone’s interest was reported.
Three years earlier, Kabel Deutschland sold shares for 22 euros apiece in its March 2010 initial public offering. A month before, Vodafone had considered an offer for the Unterfoehring, Germany-based company, valued at 5 billion euros, people said at the time. Since the IPO, Kabel Deutschland’s sales have grown 22 percent.
After Bloomberg News reported Vodafone’s interest, the U.K. company put out a statement denying any plans. Behind the scenes, Vodafone put aside an offer it was weighing because it was focused on scaling back and exiting businesses and executives were concerned about an investor backlash, people familiar with Vodafone’s thinking said.
Almost three years later to the day, on Feb. 13, Vodafone’s internal discussions about Kabel Deutschland leaked again -- this time in Germany’s Manager Magazin, sending the shares up as much as 14 percent. The leak caught Vodafone off-guard and complicated internal discussions, and the company iced its plans again, people familiar with the matter said on Feb. 26.
This time Vodafone had little time to wait for things to calm. A week before the German magazine report, Liberty Global had entered Vodafone’s backyard with the $16 billion purchase of U.K. cable-television provider Virgin Media Inc. In March, Malone bought a stake in Dutch cable operator Ziggo NV. And now word spread that he was considering a bid for Kabel Deutschland.
Still, Vodafone wanted to get something else out of the way before going after Kabel Deutschland: an agreement with Deutsche Telekom AG to access its high-speed fixed-line network, the people said. Vodafone struck the deal in May, which allows it to offer broadband and video service in Germany, notably in spots where Kabel Deutschland isn’t.
Vodafone announced a similar network-sharing deal today with Wind Hellas Telecommunications SA in Greece for the companies’ second- and third-generation mobile services. Vodafone abandoned attempts to merge its Greek unit with Wind last year after European Union regulators opposed the deal.
With the Deutsche Telekom deal in hand and after consulting Goldman Sachs Group Inc. and UBS AG (UBSN), Vodafone went to Kabel Deutschland with an offer of 80 euros a share. The German firm said that was too low and they refused to start talks, people said on June 11.
The next week, on June 17, Kabel Deutschland confirmed Liberty Global had made a preliminary offer. It was weighed down by antitrust concerns and a complex structure involving injecting Malone’s existing German cable assets into Kabel Deutschland, versus Vodafone’s all-cash bid. Still, the market saw a dawning bidding war and Kabel Deutschland’s shares rose more than 4 percent.
When gathering his executives at the Sofitel, Colao knew he faced a crucial test to win over Kabel Deutschland. Also at risk were the bankers’ fees.
For a deal this size, Goldman Sachs and UBS typically get $35 million to $50 million, according to Freeman & Co. estimates. Vodafone’s key advisers included Goldman’s Karen Cook and UBS, whose team was led by Jonathan Rowley, Simon Warshaw and Christian Lesueur. Kabel Deutschland’s bankers, which stood to earn an estimated $40 million to $60 million in fees, included Morgan Stanley (MS:US)’s Burkhard Koep and Johannes Groeller as well as Perella Weinberg Partners LP’s Dietrich Becker and Klaus Wuelfing.
After a day of back-and-forth meetings, Colao and von Hammerstein agreed on 87 euros a share, people familiar with the talks said. Kabel Deutschland’s board was willing to recommend the offer to investors, and Vodafone felt it could justify the price with synergies in cost and capital spending exceeding 3 billion euros after integration costs.
By Sunday, the companies’ supervisory boards had signed off on the preliminary agreement. The next morning they put out a statement, with Colao praising Kabel Deutschland’s “very good growth and good management” on a conference call and his finance chief, Andy Halford, calling the price “very fair.”
Still Vodafone and Kabel Deutschland don’t have a breakup fee and Malone rarely walks away from a fight.
The “Project Knight” jousting may not be over.
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