Kabel Deutschland Confirms IPO as Buyout Talks Fail

Germany's largest cable group Kabel Deutschland has confirmed that it intends to float its shares through an IPO on the Frankfurt Stock Exchange. As yet, the company has not released further information regarding either the timeline or the size of the offered stake, stating only that the IPO "will only be comprised of shares sold by the existing shareholder".

Outlook and Implications

• No Leveraged Buy-Out: The confirmation of the IPO essentially means that its majority-owner—Providence Equity Partners, which holds 88% of the stock—has scrapped its parallel plan, which was to exit the business through an outright divestment. The lack of detail in Kabel Deutschland's statement may indicate that the main motive for its release has been merely to assure the financial markets on the feasibility of the original plan, as a response to the rumours that the talks over a sale have reportedly reached a dead end (see Germany: 22 February 2010: Kabel Deutschland Plans to Proceed with IPO—Report). Earlier this month, there were several media reports that Providence had received bids within the range of 5–5.5 billion euro (US$6.8–7.5 billion) from a number of other private-equity houses, but now it appears that the owner expects to achieve a higher valuation by listing the shares. As well, although there is no indication on the size of the flotation, it is possible that Providence will simply limit its exposure to the asset and keep some of the shares. However, if volatility in the stock market increases over the coming months, there is still a relatively big chance that also this way ahead will hit the rocks, and Providence will for the time being opt for the status quo and cash flow from Kabel Deutschland's decent performance (see Germany: 11 February 2010: Kabel Deutschland's Revenue Up 9.3% in April-December as Buyout Reports Increase).
• German Cable Consolidation in 2–3 Years Likely: What makes the valuation of Kabel Deutschland rather difficult as of today, even now that the economic climate has improved from its worst state, is the fact that its appeal as an acquisition target may even increase in two to three years' time. Although the cable provider's footprint is as nationwide as it gets in Germany, with presence in 13 of the 16 states, it most significantly lacks coverage in the states of Baden-Wuerttemberg, Hesse, and North Rhine-Westphalia, which together hold a population of 34 million, or more than 40% of the German total. The company's willingness to merge with the leading cablecos in those areas—Unitymedia and Kabel BW—is as well known as the local anti-trust office's opposition for such moves. However, as Deutsche Telekom's and other fixed-line telcos' fibre-optic networks expand in the medium term, the cable sector is set to have a competitive pay-TV technology in their IP TV platforms, which then may allow the watchdog to revise its current framework and thus permit the consolidation. IHS Global Insight's understanding is that Unitymedia's new owner, American cable giant Liberty Global, has entered Germany namely with a long-term strategy of capitalising on this opportunity (see Germany: 12 January 2010: Liberty Global Interested in Further Acquisitions in Germany—Report). This means that in the future there is likely to be more market for shares in Kabel Deutschland, and, as such, Providence could still conclude that its best option is to stay aboard for now.