Tim Höttges Prime Minister of Bavaria Markus Söder 230Not really everywhere and not always a gigabit, but the worldwide trend is amazing. 22 networks around the world offer Gigabit LTE (peak) 979 megabit downloads, per the GSA findings below. 25 more are likely to reach that speed as they refarm spectrum. Peak speeds are measured in the laboratory. Average speeds are usually 50-70% slower, less at the cell edge or inside many buildings. I think of Gig LTE, as well as the variation mid-band 5G NR, as 100-400 megabits. In the field, 500-800 megabits are occasionally measured on lightly loaded networks.

80% of U.S. cable homes - including mine - can order a gigabit downstream. I took the headline from Alison Diana, who reported CableLabs' figure of gigabit of 63% of the U.S. in June, growing by 7% per month.

If the growth continued at 4%, the gigabit coverage would be over 80%. I had come to the same figure from the reports by Comcast, Charter, and Cox. The three companies have 55 million of the 63 million U.S. cable customers and have upgraded nearly all their systems.

Phone company propaganda claims cable regularly gets congested and often doesn't deliver the advertised speeds. It can happen, but the claim is generally b-------. Three 4K TV signals and plenty of web surfing fit in about 60 megabits. The vast bulk of cable (or fibre) users at any given moment are drawing less than that. The most common use of a gigabit connection is to run a speed test to make your friends jealous. On a decent cable or GPON network, "gigabit" users usually can pull 900+ megabits most of the time. This has often been confirmed by independent and government tests.

I wrote this article for German regulator Jochen Homann and U.S. FCC chair Ajit Pai. Vodafone and Liberty Global are urging Homann to approve their transaction to enable gigabit cable in Germany. (Official release below.) What Homann should do is ask them to match U.S. cable and come close to French prices before he even considers the deal. 1/3rd of Germany has no cable; 10% to 25% has lousy DSL as the only choice, often at 3 megabits. 

Homann has political cover to reject the deal. The picture is DT CEO Tim Höttges and his good friend anti-immigrant Prime Minister of Bavaria Markus Söder. Höttges wants to kill the deal and Söder is very close to power.

Vodafone sees over US$7 billion just from the synergies in the deal yet has offered only meaningless "concessions." If Homann had the courage, he would look Mike Fries in the eyes and say, "I won't approve any deal without a commitment to cover five or ten million more homes, including some in the white spaces on the map." Some believe that this would be unprofitable for "otherwise the companies would have done so already." That's an uninformed opinion; Liberty was de facto looking for over a 10% return before building. Normal returns on infrastructure are 3-7%, as they would be here.

Vodafone wildly overpaid for the Liberty Global cable holdings. John Malone's Liberty carries US$50 billion of debt and has lost money three of the last four years. (Yes, I know Malone does incredible accounting tricks.) The US$65 billion enterprise value is carried on only US$15 billion in total sales. 

T-Mobile's Neville Ray projects an average speed of under 500 megabits in 2024 after the Sprint takeover and presents that as the top reason to allow the merger. Sprint is deploying Gig LTE across most of the country in 2018 and 2019, often reaching a similar speed. That means they've offered no reason the deal is in the public interest.

Don't believe the hype.  

From GSA

Gigabit LTE:

Drawing on information collected by GSA about operator deployments of LTE-Advanced features for its comprehensive database on operator networks, technologies and spectrum (NTS), this report identifies operators investing at a technology level in Gigabit LTE (defined as carrier aggregation plus 4×4 MIMO (or above ) plus 256QAM DL).

  • 301 operators in 128 countries are investing in at least one of the three key  component technologies.
  • 95 operators in 56 countries are investing in all three key  component technologies.
  • 47 operators in 32 countries have deployed all three technologies.
  • 22 have announced Gigabit (or very near at 979 Mbps) peak theoretical throughput in the downlink in their deployed/commercial networks.
  • Nearly 10% of all launched LTE-Advanced networks can support UE
    Cat-16 peak theoretical DL speeds or above.
  • Four operators have pockets of network capable of delivering the maximum DL speeds supported by Cat-18 devices (i.e. peak theoretical throughput of up to 1.2 Gbps).

Expect many other networks to achieve Gigabit speeds very soon, as they refarm or acquire new spectrum resources, invest in higher orders of MIMO technology and implement new carrier aggregation combinations.

©2018 GSA

VODAFONE TO ACQUIRE LIBERTY GLOBAL'S OPERATIONS IN GERMANY, THE CZECH REPUBLIC, HUNGARY AND ROMANIA

09 May 2018 @VodafoneGroup

Key highlights

  • Vodafone has agreed to acquire Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for an enterprise value of €18.4 billion (the “Transaction”).
  • Accelerates Vodafone’s converged communications strategy through in-market consolidation in Vodafone’s largest market, Germany, and in Vodafone’s Central and Eastern European ("CEE") markets, the Czech Republic, Hungary and Romania.Vodafone becomes the leading next generation network (“NGN”) owner in Europe, with 54 million cable/fibre homes ‘on-net’ and a total NGN reach of 110 million homes and businesses, including wholesale arrangements.
  • Creates a converged national challenger to the dominant incumbent in Germany with the scale to accelerate achievement of the German government’s digital ambitions, bringing Gigabit connections to around 25 million German homes (62% of total German households) by 2022. The combination of Vodafone and Unitymedia’s non-overlapping regional operations will establish a strong second national provider of digital infrastructure in the German market, building on Vodafone’s long track record in bringing sustainable and effective choice and competition to the German consumer and enterprise markets.
  • Transforms Vodafone’s fixed line and convergence strategy in key CEE markets, complementing Vodafone’s existing mobile operations in the Czech Republic, Hungary and Romania. In these markets, the combined businesses will reach over 6.4 million homes (39% of total households) and will serve 15.8 million mobile, 1.8 million broadband and 2.1 million TV customers.
  • Brings together leading talent in the mobile and cable sectors. Management and employees of the acquired businesses will have the opportunity to play an integral role within the combined company in each country and across the wider Vodafone Group.
  • Estimated cost and capex synergies of approximately €535 million per year before integration costs by the fifth year post completion, with an estimated net present value of over €6 billion after integration costs. Estimated revenue synergies with a net present value exceeding €1.5 billion from cross-selling to the combined customer base.
  • Values the acquired operations at FY2019E multiples of 12.5x OpFCF1 and 8.6x EBITDA1adjusted for year five cost and capex synergies before integration costs, and 10.9x EBITDA1 before synergies.
  • Substantial free cash flow accretion anticipated over time, reflecting attractive standalone growth potential and synergy realisation. Expected to be accretive to free cash flow per share from the first year post-completionand double digit accretive from the third year2 post completion, after cost and capex synergies and before integration costs, supporting Vodafone’s intention to grow its dividend per share.
  • Vodafone intends to finance the acquisition using existing cash, new debt facilities (including hybrid debt securities) and around €3 billion of mandatory convertible bonds (‘MCBs’). Vodafone will have the option to repurchase the shares issued under the terms of the MCBs at maturity, thereby avoiding equity dilution.
  • Increases exposure to resilient converged revenues and enhances Vodafone’s growth outlook, supporting an increase in Vodafone’s long-term targeted net debt / EBITDA ratio to 2.5 – 3.0x, consistent with a solid investment grade credit rating. Pro forma for the Transaction, Vodafone's FY2018 net debt/EBITDA3 is expected to be at the upper end of this range.
  • The Transaction is subject to regulatory approval, with completion anticipated around the middle of calendar 2019.

Vodafone Group Chief Executive Vittorio Colao said: “This transaction will create the first truly converged
pan-European champion of competition. It represents a step change in Europe’s transition to a Gigabit Society and a transformative combination for Vodafone that will generate significant value for shareholders. We are committed to accelerating and deepening investment in next generation mobile and fixed networks, building on Vodafone’s track record of ensuring that customers benefit from the choice of a strong and sustainable challenger to dominant incumbent operators. Vodafone will become Europe’s leading next generation network owner, serving the largest number of mobile customers and households across the EU.”

Introduction

Vodafone Group Plc (“Vodafone” or the “Group”) announces today that it has agreed to acquire Unitymedia GmbH (“Unitymedia”) in Germany and Liberty Global’s operations (excluding its “Direct Home” business) in the Czech Republic (“UPC Czech”), Hungary (“UPC Hungary”), and Romania (“UPC Romania”), for a total enterprise value of €18.4 billion (the “Transaction”). This is expected to comprise approximately €10.8 billion of cash consideration paid to Liberty Global and €7.6 billion of existing Liberty debt, subject to completion adjustments.

Unitymedia is the second largest cable operator in Germany with 13.0 million homes passed, of which 11.0 million are currently marketable4, reaching 12 of the largest 20 cities in Germany. Unitymedia provides services to 7.2 million unique customers. UPC Czech and UPC Hungary are the largest cable operators in the Czech Republic and Hungary, with 1.5 and 1.8 million homes passed (33% and 43% of total households) respectively. UPC Romania is the second largest NGN operator in Romania, with 3.1 million homes passed (41% of total households). Together, the three CEE companies provide services to 2.4 million unique customers.

Principal Group benefits

Accelerates Vodafone’s convergence strategy in Europe. Pro forma for the Transaction, Vodafone will become the leading next generation network owner in Europe, with 54 million cable/fibre homes ‘on-net’ and a total NGN reach of 110 million homes and businesses, including strategic partnerships and wholesale arrangements, accelerating its position as Europe’s leading fixed line challenger providing converged services to consumers and enterprise.

Increases Vodafone's exposure to resilient, converged revenues. Post-Transaction, fixed line/TV services will represent 35% of European pro-forma revenues, up from 29% prior to the Transaction, and Europe will represent 77% of the Group’s EBITDA.

In-market consolidation with substantial cost and capex savings. The Transaction is expected to generate substantial cost and capex synergies before integration costs of approximately €535 million per annum by the fifth year after completion, equivalent to a net present value of over €6 billion after integration costs. These savings are similar in nature to those generated by the successful integrations of Kabel Deutschland in Germany and ONO in Spain. The principal efficiencies derive from network integration, IT/billing simplification, procurement, and consolidating overlapping functions. Further savings will be driven in Germany from the migration of Vodafone’s existing overlapping fixed line DSL customer base to the Unitymedia cable network.

Significant revenue synergy potential. As in its previous cable transactions, Vodafone intends to use its leading brand, extensive distribution network and scale to accelerate the growth of the combined businesses. This includes the cross-selling of Liberty Global’s high quality fixed broadband, telephony and TV offerings to Vodafone’s existing customers. Vodafone also expects to be able to cross-sell its mobile services to Liberty Global’s customers. Vodafone estimates that upside potential from revenue synergies is equivalent to a net present value of more than €1.5 billion.

Value-accretive transaction. The Transaction values the acquired operations at FY2019E multiples of
12.5x OpFCF1 and 8.6x EBITDA1, adjusted for year 5 cost and capex synergies before integration costs, and at
10.9x EBITDA1 before synergies. The returns from the Transaction5 are expected to exceed the estimated cost of capital for the acquired operations within 5 years5. The Transaction is also expected to be accretive to Vodafone’s free cash flow per share (post normalised spectrum costs) after cost and capex synergies and before integration costs from the first year post completion. Assuming the shares issued under the terms of the MCBs are bought back at maturity, the Transaction is expected to be double digit accretive to free cash flow per share from the third year post completion (after cost and capex synergies and before integration costs).

Principal benefits in Germany

Bringing Gigabit connections to around 25 million German households by 2022The combination of Vodafone and Unitymedia will create the leading fully converged national challenger to the dominant incumbent with the scale to invest in upgrading around 25 million cable households to Gigabit-speed connections in just four years. The combined company will achieve approximately two-thirds of the German government’s 2025 ambition for Gigabit connectivity across the country, and will do so three years ahead of the government’s schedule. This significant network rollout acceleration will follow other pioneering Vodafone initiatives already underway, including connecting around 1 million rural consumer homes and 100,000 small and medium-sized enterprises in around 2,000 business parks to Gigabit networks by 2022.

Creating a strong second provider of digital infrastructure in the German market. The combined company will benefit from a robust financial position and a proven track record in laying the foundations of Germany’s Gigabit Society. With 30.8 million mobile customers, 10.0 million broadband connections (of which 7.0 million are ‘on-net’) and 14.0 million TV households post-Transaction, generating €13.0 billion of pro-forma revenues in the 2017 calendar year (of which 49% are driven by fixed line/TV services), the combined company will be well placed to ensure that German consumers and businesses benefit from sustainable and effective competition and choice in digital infrastructure and converged services.

Significant standalone growth potential. Unitymedia is well positioned for growth, with significant upside to current broadband penetration which is amongst the lowest in Europe at only 32% of marketable homes. In addition, Unitymedia’s TV ARPU is lower than that of most other cable operators (currently €14), minimising cord-cutting risk. Furthermore, Vodafone believes there is an opportunity to accelerate the sale of B2B services, particularly through increased sales to SMEs.

Principal benefits in Central and Eastern Europe

Transforms Vodafone’s convergence strategy in key CEE markets. The Transaction will accelerate the availability of converged fixed, mobile and TV services in the Czech Republic, Hungary and Romania. Vodafone’s NGN coverage will expand to 33% of homes in the Czech Republic, 43% in Hungary and 41% in Romania, reaching a total of 6.4 million homes passed. Vodafone’s and Liberty Global’s businesses in CEE are highly complementary, bringing together Liberty Global’s 1.8 million broadband and 2.1 million TV customers with Vodafone’s 15.8 million mobile customers to enable the combined company to offer a range of new converged services to consumers and enterprise in those markets on a national basis.

Acquisition of attractive businesses in the Czech Republic, Hungary and Romania with significant growth prospects. These businesses are also well positioned for further growth, with upside to current broadband penetration (currently at 28% of homes passed) and potential for future network footprint expansion.

Management and employees

Vodafone values the expertise of the Liberty Global management teams and employees in Germany, the Czech Republic, Hungary and Romania, and looks forward to bringing together the leading talent in the sector in all four countries. As in similar prior Vodafone transactions, management and employees of the acquired businesses will have the opportunity to play an integral role within the combined company in each country, deploying their skills in cable, fixed line and TV services as well as a range of professional functions. Employees from the acquired operations will also benefit from a broader range of international career opportunities available across the Vodafone Group.

Transaction details and financing

UPC Czech, UPC Hungary and UPC Romania will be acquired on a cash-free, debt-free basis, while it is expected that Unitymedia’s existing bond structure (€4.5 billion outstanding today6) will be retained and refinanced over time, with €2.2 billion of Unitymedia’s term loans to be refinanced shortly after completion.

The €10.8 billion of cash consideration payable to Liberty Global and the refinancing of Unitymedia’s term loans will be financed using Vodafone’s existing cash, around €10 billion of new debt facilities (including hybrid debt securities) and around €3 billion of MCBs, which will be issued prior to completion. The cash consideration payable to Liberty Global will be subject to adjustments for net debt and other items at completion.

In total, Vodafone intends to achieve equity credit of €5-7 billion from credit rating agencies through the issuance of hybrid debt securities and MCBs, thereby securing a solid investment grade credit rating. Hybrid debt securities will not reduce Vodafone’s net debt on a reported basis. The MCBs will be accounted for as equity.

The increased exposure to resilient converged revenues and an enhanced growth outlook supports an increase in the Group’s long-term targeted net debt/EBITDA ratio to 2.5–3.0x compared with 2.0–2.5x currently. Pro forma for the Transaction, and after excluding the EBITDA benefit from UK handset financing and settlements, Vodafone's FY2018 net debt/EBITDA (on a consolidated reported basis) is expected to be at the upper end of this range.

The MCBs are expected to mature around three years after completion. Assuming the Group has sufficient headroom within its targeted 2.5-3.0x leverage range, Vodafone may elect to purchase the shares issued under the terms of the MCBs, thereby avoiding equity dilution. Vodafone will also hedge its exposure to share price movements during the term of the bonds via an options strategy. This strategy involves the purchase of call options funded by the sale of put options, which ensures that at maturity, the economic cost to repurchase the MCBs will be similar to the face value of the bonds at issuance; additionally, when the MCBs convert to equity, they will effectively do so at the prevailing share price at the time of conversion.

Dividend policy unchanged

Vodafone reconfirms its intention to grow the dividend per share annually, which is further supported by the expected accretion to FCF per share from the Transaction.

Integration and transitional services agreement (“TSA”)

The parties have agreed that for a period of time post completion, Liberty Global will provide certain transitional services to Vodafone in the relevant countries. These services principally comprise IT and TV platform technology-related services, connectivity and other support services. The annual charge to Vodafone (operational expenditure and capital expenditure) for these transitional services would be equivalent to €128 million in FY2019E, on a pro-forma basis. This full annual charge has been included in the OpFCF and EBITDA transaction multiples set out in this announcement and is expected to fall over time as the businesses are integrated into Vodafone Group.

Total integration costs of approximately €1.2bn will be incurred over the first 5 years post completion to achieve the cost, capex and revenue synergies. These costs include the migration of Vodafone’s fixed line customers and replacing the transitional services to be provided by Liberty Global.

Regulatory approvals and conditions to completion

The Transaction will be subject to review by and approval from the European Commission.

The Vodafone and Liberty Global businesses are highly complementary in each country. There is limited overlap and, therefore, no negative impact on competition resulting from the Transaction.

In Germany, there is no geographic overlap between Vodafone’s cable network and Unitymedia’s cable network; the two companies operate their cable businesses in different parts of the country, and serve different customers. The combination of these complementary cable networks does not, therefore, reduce customer choice for TV or broadband. Customers (including housing associations) will continue to have a range of alternatives.
For TV, these include satellite (which accounts for the largest proportion of the TV segment of the German market), cable and broadband internet streaming/download offerings.

In the Czech Republic, Hungary and Romania, Vodafone is primarily active in the mobile segment of these markets and has no meaningful presence in each country’s fixed line or TV segments; Liberty Global is primarily a fixed line and TV operator with little or no mobile activities.

A break fee of €250 million will be payable by Vodafone, in certain circumstances, if the Transaction does not complete.

The Transaction is not subject to Vodafone or Liberty Global shareholder approvals.

Vodafone anticipates that completion will take place around the middle of calendar 2019.