Vodafone has agreed to buy Germany's largest cable operator Kabel Deutschland for €7.7bn.
In Vodafone's largest deal in six years and its second major buy of a European fixed-line network in 12 months, the group is offering a near 40 per cent premium to Kabel's share price before its interest first emerged in snapping up the target's 8.5 million connected homes.
With consumers wanting to watch TV and video on an array of devices, cable assets have become more attractive as they can provide internet services at speeds often five times faster than competing services from traditional telecom companies.
So-called "quad-play" services offering TV, broadband, mobile and fixed-line telephony have caught on rapidly in markets such as France and Spain, but the largely fragmented German cable market is still some way behind, meaning a deal could enable Vodafone to steal a march on rivals such as Liberty Global’s Unity Media and Deutsche Telekom.
"The value of infrastructure is now in focus with telecom companies and cable providers increasingly in competition with each other," Andreas Mark, a portfolio manager with Union Investment, a shareholder in Kabel Deutschland, says. "Clients want a stronger network and better performance."
The high price shows the desire of the world's second-largest mobile operator to adapt in its core market of Europe, where increasing regulation and recession have hit revenue and forced it to write down the value of its assets.
The price was pushed up in the last week by an approach from Liberty Global, run by John Malone, which could still return with a higher bid, but two sources familiar with the German group said they did not expect that to happen.
"Although you should never underestimate someone as aggressive as Malone, it is very difficult to see how Liberty could make a bid in cash that would be higher than what KDG (Kabel Deutschland) already considers a good price," one of the sources said.
Malone's Liberty Global has been the most active acquirer in Europe in the last few months, buying Virgin Media and increasing its stake in Dutch group Ziggo, stretching its balance sheet and perhaps hampering its options in Germany.
Liberty could seek to merge Unity Media with Kabel Deutschland, but this would likely be a more complicated deal that would take longer to be approved by regulators.
One top-10 Vodafone shareholder said he worried it could signal the start of a takeover spree by a group that does not have the best track record in European deal making, given the write-off after its biggest-ever deal for Germany's Mannesmann.
"The deal is not large enough or expensive enough to be really worrying, but I hope that this does not mark the start of a string of acquisitions," the investor said.
Vodafone could look next at fixed assets in Spain including cable operator ONO, or in Italy with broadband specialist Fastweb, owned by Swisscom, analysts have said.
Vodafone Chief Executive Vittorio Colao said investors should not read anything into the fact he had chosen to buy a network in Germany rather than build or rent lines.
Colao was also forced to defend his decision in 2010 not to buy Kabel Deutschland before it went public at €22 a share.
The CEO had said earlier this year he could afford to do deals in Europe without having to sell his prized asset, a stake in US group Verizon Wireless, which partner Verizon Communications has said it would like to buy in what would rank as one of the world's biggest deals.
Vodafone, following up its acquisition of Cable & Wireless Worldwide last year, said it would finance the new deal with existing cash resources and banking facilities, taking its 2013 net debt to earnings ratio to 2.4 times from 2.0 times.
The board of Kabel Deutschland said it expected to recommend shareholders accept an offer creating a group with 11.5 billion euros of revenue in Germany, from 32.4 million mobile, 5 million broadband and 7.6 million TV customers.