UK telecom titan Vodafone (VOD) agreed to acquire Spanish cable business Ono for €7.2bn (£6bn) this week, part of the company's strategy to supplement its core wireless offerings with fixed-line services. Ono's private equity owners rebuffed Vodafone's earlier advances in favour of going public, but relented once the price was right.
Ono is Spain's second-largest broadband, pay-TV and fixed-line service provider. Purchasing it should strengthen Vodafone's standing in a difficult Spanish market - its sales there slumped 14 per cent last quarter and its margins contracted. Vodafone has struggled against Spanish rival Telefonica's "fusion" strategy of offering TV, phone and broadband services, which appeals to customers who increasingly prefer a sole provider. Now Vodafone can bundle Ono's and its services together and charge a premium, too. It can also leverage Ono's networks, complementing its ongoing joint venture with Orange to develop fibre networks in Spain.
Ono's price tag values it at 10.6 times its cash profits last year, falling to 7.5 times if Vodafone achieves the €2bn in cost savings it expects from the deal. That's in line with the €10bn that Vodafone paid for German fixed-line operator Kabel Deutschland last year, about 12.4 times cash profits. Moreover, the UK company foresees a further €1bn in revenue synergies with Ono by combining their distribution and marketing, and cross-selling to each other's customers. Still, it's questionable whether Ono deserves its valuation. Its cash profits fell 16 per cent year on year last quarter following price cuts, and it has lost close to 10 per cent of its pay-TV customers in the past two years.
Vodafone has been in a buying mood, with $30bn-$40bn (£18bn-£24bn) burning a hole in its pocket following its disposal of its stake in US operator Verizon Wireless last month. Aside from acquisitions, it has set aside £7bn for its "project spring" initiative to develop 4G mobile and fixed-line services in Europe. It has also earmarked £19bn in network spending over the next two years, and is already building fibre broadband in Portugal and Italy.
Network investment and deal-making have been characteristic of Europe's fragmented telecoms industry lately, as operators race to gain scale and bolster their product ranges. Vodafone's Ono purchase isn't the only recent example of sector consolidation - French media giant Vivendi is in talks to sell its SFR telecoms arm to global cable company Altice. Foreign players have also made inroads into Europe, with US cable business Liberty Global buying Virgin Media for £14bn early last year, and spending about €10bn to take over Dutch broadband provider Ziggo. In fact, there were 20 billion-dollar deals targeting European telcos last year, says researcher Dealogic, totalling over $106bn, the highest level since 2005.
