Vodafone Group Plc (ADR) (VOD): Quad-Play Is the Next Big Thing

The entire telecom industry is going to through a restructuring process. In the last few months, a number of M&A related stories have hit the market. Whenever an industry reaches its maturity, there is industry wide consolidation. This consolidation serves a number of purposes, most importantly price based competition. As dominant players in maturing industries are cash rich, a lack of organic growth opportunities forces them to pay large dividends. An alternate method is to look for acquisitive growth in a mature industry that doesn’t offer organic growth.

The pursuit of this growth is the primary reason for the intensive M&A efforts in the telecom industry. Leading industry players like Vodafone Group Plc (ADR) (NASDAQ:VOD), Sprint Nextel, Clearwire and Verizon are all looking for mergers or acquisitions. Companies operating in mature industries are usually dividend players and offer little in terms of capital gains. M&A can cause rallies even in these sluggish securities and provide lucrative investment options for investors.

Quad Play

Vodafone Group Plc (ADR) (NASDAQ:VOD) is the world’s second largest telecom operator in terms of subscribers and revenues. The company has approximately 439 million subscribers, spread across 70 countries. It is an acquisition juggernaut and has been involved in M&A in almost every corner of the wrold. Vodafone has been in the news for trying to buyout Kabel Deutschland, the German cable company.

Vodafone Group Plc (ADR) (NASDAQ:VOD) has strategic reasons to buy Kabel. There is a growing demand in Europe for television, broadband, mobile and fixed-line under the same brand. This ‘quad play’ is the next big thing in European telecom industry. Germany is its largest European market and Vodafone Group Plc (ADR) (NASDAQ:VOD) is determined to provide the comprehensive coverage that the market demands. Before trying to acquire Kable, the telecom giant had approached Deutsche Telekom for renting lines. This would have allowed Vodafone to provide TV and broadband services in Germany, through rented lines from Deutsche Telekom.

Despite this wholesale DSL deal with Deutsche Telekom, Vodafone has still decided to acquire Kabel. This might be an indication of another upcoming trend in the telecom industry. It is an indication that infrastructure ownership is crucial for ‘quad play’ ambitions. It is highly likely that this trend will repeat itself across other global markets and cash rich giants would continue to amass telecom infrastructure. Another example from across the ocean is the struggle of Sprint and Dish to control Clearwire.

The Deal

Originally, Vodafone Group Plc (ADR) (NASDAQ:VOD) had offered to buy Kabel for 81 Euros per share, 10% premium to its recent offer of 7.2 billion euro ($9.6 billion). This offer had induced a rally in Kabel shares. The situation got even more interesting when Liberty Media Corp (NASDAQ:LMCA) entered the negotiations with an 85 euro per share offer of their own. Liberty Media has emerged as one of the biggest telecom empires in Europe and is on an acquisition spree.