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After a preliminary acquisition offer last week, according to sources, Vodafone Group Plc. (VOD - Analyst Report) has raised its bid to €7.5 billion from €7.2 billion (approximately $9.6 billion) for Kabel Deutschland. This brings the new offer to around 85 euro cents per share from the previous bid of €0.80–€0.82.

We believe that Vodafone’s new offer is a strategic counter reaction to the proposed plan of Liberty Global Inc. (LBTYA - Analyst Report) to acquire Kabel Deutschland. Recently, Liberty Global made a higher offer to Kabel Deutschland, outbidding Vodafone’s initial offer.

Kabel Deutschland, with a net worth of €8 billion, covers over 8 million German households. It offers wireline services like HD and analog TV, Pay TV and broadband Internet with speeds of up to 100 Mbps and fixed-line voice services through cable as well as wireless services through industry collaborations.

It is evident that the prospective acquisition would oust major players in the German wireline industry. Vodafone would then be an undisputed leader in wireline business with the biggest loaf of cable TV and broadband business in Deutscheland.

West Europe is experiencing a growing demand for pay-TV services together with triple-play bundled services that combine basic cable TV, and Internet. Telephone carriers like Vodafone are increasingly looking for markets, where they can increase share with bundled video, broadband, and telephone that warrant higher margin and lower churn rates.

But, beyond this, Vodafone foresees significant cost synergies (approximately 300–500 million Euros) by not having to pay rentals for copper lines to Deutsche Telekom. Vodafone currently requires these copper lines to provide its 3.3 million customers in Germany with DSL services.  

Further, Vodafone’s efforts to bring its customers within one network infrastructure (DSL to LTE) through the deal would result in additional savings for the company by curtailing spending on network build outs.

However, we believe that the implementation of network conversion remains a long-term process and involves structural changes. Hence, in the near future, we expect the likely Kabel Deutschland deal, which comes with an existing set of network backhauls, to provide a good platform for offloading data traffic and resolving spectrum issues for Vodafone.

However, the biggest challenge for the company will be to win antitrust approval.  Historically, this issue has impeded the successful completion of many deals such as the AT&T Inc. (T - Analyst Report) and T-mobile acquisition. Given the size of Vodafone’s prospective deal and its impact on the competitive position of players like Liberty Global, there lies a fair chance of regulatory intervention.

Vodafone, which operates in the European market with the likes of France Telecom currently carriers a Zacks Rank #3 (Hold).

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