Will Vodafone Spending Spree Buy It A UK Fixed Network?

Vodafone CEO Vittorio Colao recently boasted that his company has the capacity to spend between $30 billion (£18bn) and $40 billion (£24.1bn) on acquisitions in the next few years and that no target was out of reach.

The British operator will certainly be flush with cash once it completes the $130 billion (£78.3bn) sale of its 45 percent stake in Verizon Wireless later this month – even after it has returned a significant sum to shareholders and invested £19 billion in its global network over the next two years.

Reduce mobile dependency

But what sort of companies should it buy? A pattern has emerged from its recent acquisitions: the company wants to reduce its dependency on the business for which it is best known: mobile services.

In recent months, Vodafone  has frequently cited challenging economic and regulatory conditions for slumping revenues in southern Europe, while income is also falling in previously strong markets such as the UK and Germany. In the third quarter of 2013, revenues in Spain and Italy fell by 14.1 percent and 16.6 percent, while they also shrunk by 7.6 percent in Germany and 5.1 percent in the UK.

Colao told reporters last November that he is confident the European situation will improve, but the company has moved to build and purchase fixed line networks so that it can offer quad-play packages of mobile, broadband, television and landline services, which are popular on the continent.

He is adamant that Vodafone has the money to consider acquisitions if they made sense of the businesses, but won’t go on a shopping spree just because it has money burning a hole in its pocket.

Money to spend

“I don’t like the word shopping spree or expression ‘war chest’ or ‘big wallet’,” he told reporters in November. “All these things indicate that you do things when you have the money but don’t when you don’t have the money. That’s not how a public company like ours works.”

But it has made major moves for a number of companies in the last few years, most notably when it fended off competition from Liberty Global for Kabel Deutschland last year. It agreed a €7.7 billion (£6.3bn) deal for Germany’s largest cable operator, increasing its customer base overnight, allowing it to offer quad-play deals and operate its own backhaul network.

Vodafone has started work on fibre networks in Italy and Spain, but geographical limitations mean it is also going shopping in southern Europe. Despite agreeing an access deal with rival Telefonica, Vodafone has reportedly tabled a £5.8 billion bid for Ono and has also been heavily linked with Swisscom-owned Fastweb.

It’s also the preferred bidder to construct a government-assisted fibre network in Ireland using the country’s electricity network, reducing Vodafone’s dependency on Eircom and BT Ireland, whose superfast networks it currently uses to provide Internet services to customers.

UK dilemma

But in the UK, there appear to be no obvious targets and Vodafone lacks a fixed line presence, a cause for concern given Liberty Global’s recent takeover of Virgin Media and BT’s plans to launch a mobile service to complement its extensive fibre and premium television offerings.

Vodafone and Sky have reportedly discussed a possible alliance involving content sharing or even building their own fibre network together, but the cost of the latter course of action is likely to prove prohibitive.

“It’s a topic we will have to look at in the next few years,” Colao said when asked last November if it had plans to build a superfast broadband network.

Of course, Vodafone has the enterprise network it acquired in the acquisition of Cable and Wireless for £1 billion in 2012, and Colao says its initial focus is on enterprise services because they are more profitable than those targeted at consumers. This is especially true in London, where Vodafone is investing a significant amount.

“We want to lead in London,” Colao said, adding that the capital had a number of large customers with big spends.

Buying Liberty Global?

It might be surprising that Vodafone never made an approach for Virgin Media when Liberty Global bought the cable provider for $23.3 billion last February, but if you believe what you read, the Newbury-based operator could get its hands on the Branson-branded network eventually.

Liberty Global is being touted as Vodafone’s ultimate acquisition target. With cable networks in 14 countries, Liberty would expand Vodafone’s cable footprint across Europe overnight. Vodafone’s $40 billion should more than cover the cost  – but such a deal might attract the attention of German regulators, given the company’s ownership of Kabel Deutschland.

Owning Liberty would also protect Vodafone against a takeover by AT&T, which has been sniffing around for a European operator recently, but this might not please some Vodafone shareholders. Many of them may have approved the sale of Vodafone’s 45 percent stake in Verizon Wireless, specifically to make Vodafone more attractive to a US network.

Fixed line future

Vodafone has fingers in many pies, and its performance in emerging markets such as Turkey, India and South Africa is encouraging, but it is clear that the company wants to diversify away from its mobile roots in order to maintain growth.

Although selling its Verizon stake provides a useful windfall, it’s also worth pointing out that Verizon Wireless was one of the more profitable parts of Vodafone. Whatever it buys will have to be a good replacement – and it is very clear the company sees fixed line broadband and quad-play packages a way of ensuring this.

And in the UK, with Sky, BT and TalkTalk all moving into each other’s traditional territories, it might have to move quickly if it isn’t going to miss out.

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