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Vodafone in Domination Deal with Kabel

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Vodafone Group plc (VOD - Free Report) has reportedly agreed to a domination agreement with Kabel Deutschland Holding AG, after its acquisition of the latter in September for €7.7 billion ($10.21 billion). According to Reuters, the agreement entails payment of €84.53 per share to the remaining shareholders.

We believe that the successful completion of the domination agreement will strengthen Vodafone’s position in the acquired company and hence foster its presence in the European telecommunication market.

It is evident that the prospective acquisition will 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 Germany.

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

However, beyond this, Vodafone foresees significant cost synergies (approximately 300–500 million euros) as it will not have to pay rentals for copper lines to Deutsche Telekom (DTEGY - Free Report) . Vodafone currently requires these copper lines to provide DSL services to its 3.3 million customers in Germany.

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

Vodafone, which operates in the European market with the likes of Orange (ORAN - Free Report) , Telecom Italia S.p.A. (TI ) and Telef (TEF - Free Report) , currently carries a Zacks Rank #3 (Hold).

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