Global Insight Perspective | |
Significance | Vodafone has fully consolidated Arcor making it a fully integrated rival to Deutsche Telekom. |
Implications | Although Vodafone and Arcor had been offering joint products previously, the merger projects Vodafone's intentions to be a key competitor, both in the mobile and the fixed markets in Germany. |
Outlook | Given that the merger is largely symbolic, nothing much will change in the German market. However, Vodafone may now want to buy Tiscali to give it fixed assets in all its core European markets. |
Vodafone's acquisition of the last remaining 26.4% stake in Arcor which it did not own previously has redefined the German telecoms market, creating the biggest rival to Deutsche Telekom. Prior to the buyout, Deutsche Telekom had been the only integrated telco in the market, leveraging its different segmental businesses to remain ahead of other pure play providers in the market. Vodafone on Monday reported that it had agreed to acquire the 26.4% stake in Arcor from Deutsche Bank and the German rail company, Deutsche Bahn for a cash consideration of 474 million euro (US$738 million). Arcor has 2.6 million DSL lines in Germany, about a 14% market share in a market which is growing at just under 30% per annum, according to Vodafone (see Germany: 17 April 2008: Vodafone Inches Closer to Full Control of Arcor, .
Commenting on the deal, Vodafone's Chief Executive, Arun Sarin, said the deal is consistent with the group's total communications strategy. "By taking full control of Arcor and aligning it more closely with Vodafone Germany we will leverage the greater scale this presents, and generate synergies and substantial time to market benefits within Europe's largest telecommunications market," he said.
Meanwhile, in an apparent swift reaction to the impending merger of Vodafone and Arcor, Deutsche Telekom slashed the price for a combined internet and fixed-line phone by an average 17% for new subscribers. However, Financial Times Deutschland reports that rivals are not necessarily going to replicate the offer. The paper quoted the head of Germany's telecommunications industry association, Juergen Gruetzner, as saying: "We will not see a new round of price cuts at this point".
Outlook and Implications
- Squaring Up in Germany: Although Vodafone has been offering bundled services with Arcor, their full consolidation has the potential to escalate competition in the German telecoms market. While the merger is largely symbolic, it, at least, projects Vodafone's commitment to actively challenge Deutsche Telekom in the market. In the past twelve months, continued price wars among the mobile operators—Deutsche Telekom's T-Mobile, Vodafone, KPN's E-Plus, and Telefónica's O2—and the leading fixed players has dampened profitability among them. Perhaps that helps explain why there is little incentive to match Deutsche Telekom's latest price cut. Going forward though, Vodafone will be better able to roll out products incorporating Arcor's products, and through Arcor, should be able to cancel out any perceived advantages Deutsche Telekom has in IP TV and high-speed broadband networks. Indeed, Arcor is already rolling out a nationwide VDSL network and has trialed an IP TV service (see Germany: 15 November 2007: Vodafone's Arcor Unit to Build German Nationwide VDSL Network and 28 May 2007: Arcor Starts IP TV Trials).
- End of an Era: The merger of Vodafone and Arcor finally lays to rest Vodafone's posturing as a mobile-only player or for pursuing an asset-light DSL strategy. Less than 24 months ago, Vodafone was looking to sell its 73.6% stake in Arcor, believing then that mobile broadband would guarantee its future. However, Vodafone's strategy reversal was swift once it became clear to the company that Arcor was far more than an asset rather than a liability. Accordingly, its partners in Arcor tried to extract optimal valuation with Deutsche Bahn reportedly demanding 649 million euro for an 18.17% stake in Arcor. Indeed, Vodafone's eventual deal for a 26.4% stake at 474 million euro is a major bargain. More importantly though, by fully consolidating Arcor, the United Kingdom becomes the only major market in Europe where Vodafone does not have a fixed asset; that could well make Vodafone the likeliest player to buy Tiscali (see Italy: 17 April 2008: Vodafone Joins the Race to Buy Tiscali—Reports, Germany: 23 January 2008: Deutsche Bahn Drops Demand for Arcor Stake—Reportsand Germany: 29 October 2007: Deutsche Bahn Requests US$936 mil. for 18.17% Stake in Arcor).