Vittorio Colao’s decade leading Vodafone has been defined more by firefighting than the empire-building of his predecessors. Huge transactions, including Vodafone’s $130bn exit from the US in 2015 and last year’s $23bn deal to merge its troubled Indian operation with local rival Idea, have been defensive, with major acquisitions elusive.
Perceptions that the Italian chief executive lacks a bold strategy would have vanished had he secured a long-touted merger with Liberty Global, the European group controlled by US “cable cowboy” John Malone.
Despite the two companies dancing around each other for years, that deal proved out of reach. But Mr Colao has finally delivered a large acquisition, with Vodafone confirming on Wednesday the €18.4bn takeover of Liberty assets including German cable unit Unitymedia and three smaller peers in the Czech Republic, Hungary and Romania.
It is Vodafone’s biggest takeover since the record-breaking £112bn acquisition of Mannesmann in 2000 that first took the British company into Germany, and the most significant in European telecoms since Spain’s Telefónica pounced on the UK’s O2 in 2005.
The combination creates a genuine competitor to Deutsche Telekom, Europe’s largest telecoms company, in its German backyard and delivers on the long-held ambition of European investors and regulators to create a regional champion capable of going toe-to-toe with global giants such as China Mobile, Verizon and AT&T in the race to invest in 5G.
“Frankly, the EU has always been talking about creating cross-country European champions,” Mr Colao said after signing the deal. “This is the first and the biggest creation of one in both fixed and mobile . . . We are the only true genuine challenger.”
Vodafone expects the combination to yield €535m of cost and capital expenditure savings a year and transform it from the fastest-growing broadband company in Europe to the biggest, with 54m customers and infrastructure that gives it potential to reach 110m premises.
Scale is key for Vodafone and the deal gives it the tools to fight the incumbent players in Germany and eastern Europe. It also gives the company a boost as regional rivals seek to unify their fixed-line and mobile offerings.
“Orange and Telefónica are already working on converging their networks,” said John Delaney, analyst with IDC. “Vodafone also needs to develop convergence in its network infrastructure in order to remain competitive.”
Mr Colao said the convergence of networks was a trigger for finally sealing a Liberty deal after years of trying. “Over time, the logic of putting together fixed and mobile makes more sense,” he said, citing BT’s acquisition of EE and Vodafone’s merger with Liberty’s Ziggo cable network in the Netherlands.
He also said that “buyers’ and sellers’ expectations” had changed over time. The price was below the €20bn some analysts had pencilled in for Liberty to do a deal, with Mr Malone known to drive a hard bargain.
A full Vodafone-Liberty deal would have triggered a wave of megamergers, according to bankers specialising in mergers, with Deutsche Telekom eyeing BT and Orange potentially pushing into Italy. Yet the smaller deal will still create a ripple effect.
“We believe this event is a bellwether for the sector, and could potentially contribute toward a flurry of consolidation across Europe,” analysts at JPMorgan said in a note.
The sale — which follows the disposal of Liberty’s Austrian unit last year — raises questions about the future of the Europe-wide network built by Mr Malone and Mike Fries, chief executive, as investors target growth opportunities in Latin America and the Caribbean.
The “great unravelling of Liberty’s cable empire continues”, said Dhananjay Mirchandani, an analyst with Bernstein. The company’s residual assets in Switzerland, Poland, Slovakia, Belgium and most notably the UK — where it owns Virgin Media — are now in focus.
Yet Mr Fries dismissed the notion that Liberty was in retreat in Europe, insisting that “we are going to stay the course”. He said that with the business being sold only representing 29 per cent of the group’s overall earnings, “we’ve got a lot of wood to chop”.
Mr Fries may also turn hunter. Liberty, which will be flush with €10.6bn in cash if the deal completes, has been linked to a number of targets in the UK including broadcaster ITV and mobile operator O2, and in Switzerland via a merger with telecoms group Sunrise.
While Mr Fries played down talk of an imminent deal, saying “there’s no impending transaction, no drama on M&A,” he hinted that the company could pounce once the Vodafone cash was secured. “It’s not going to stay in the bank,” he said.
There is also the potential for Vodafone eventually to acquire another Liberty asset, with Virgin Media still an obvious fit for its mobile network in the UK.
“Virgin Media is not on the agenda,” said Mr Colao. “For now.”
It has taken years for Vodafone and Liberty to reach an agreement but the company still faces a formidable task getting the combination past the regulators. Deutsche Telekom has already pledged to shoot down the deal and Tim Höttges, chief executive of the German company, on Wednesday reignited his feud with Mr Colao, warning that his enlarged rival would be a “giant preening with convergent technology”.
Mr Colao said he was “amused” by his counterpart’s comments given Deutsche Telekom controls 70 per cent of sector revenue in Germany. “It’s bad news for him now there is a second national player, he said. “I find his argument frankly self-serving.”
Regulators forced Deutsche Telekom to split off its cable network at the turn of the century and the business was broken up into regional players that have since been bought up by Liberty and Vodafone.
Berlin has blocked previous attempts to consolidate the market. However, the inclusion of the eastern European assets in the Vodafone-Liberty deal means the European Commission is likely to control the process which, according to German competition lawyers, vastly increases the chances of it being cleared. Bernstein’s Mr Mirchandani believes the chances of the deal being approved are healthy, at about 60 per cent.
Mr Colao now has the heavy lifting to do to make the deal work but his patience in landing the Liberty deal may yet define his era.
Germany’s key role in Vodafone growth story
Germany has played a central role in Vodafone’s transformation from a small UK mobile network based in leafy Berkshire to a global giant responsible for three of the largest deals in telecoms history.
At the turn of the century Vodafone made an audacious swoop on Mannesmann, a former steel pipe manufacturer that grew rapidly in the 1990s to become Germany’s largest mobile phone business. The £112bn acquisition, which remains the largest in corporate history, doubled the UK company’s size. It was also the first time a foreign company had bought a German business in a hostile takeover.
The bid, on December 23 1999, was triggered by Mannesmann’s chairman Klaus Esser launching a bid for Orange, then a British business, breaking a “gentleman’s agreement” struck with Chris Gent, Vodafone’s chief executive, under which the German company was not to encroach on the British market.
The deal also brought Mr Colao, who was then running Mannesmann’s Italian business Omnitel, into the Vodafone fold.
Germany has continued to be central to Vodafone’s transformation in the two decades since.
In 2008 it bought the railway company Deutsche Bahn out of landline telecoms joint venture Arcor, as Vodafone started to move away from its mobile roots.
It then moved on the cable sector in 2013 with the €7.7bn takeover of Germany’s largest player Kabel Deutschland, setting the tone for Vodafone’s strategy in broadband as well as its European expansion.