The Battle Over Kabel Deutschland Puts Vodafone Group plc’s Growth Strategy At Risk

As Vodafone (LSE: VOD) (NASDAQ: VOD.US) tries to kick-start sales growth across Europe the company is seeking to expand into new markets. Specifically, the group is looking to widen its offering to customers by offering mobile, pay-tv and internet, ‘multimedia bundles’. 

A key part of this strategy has been the acquisition of several smaller European multimedia peers, such as Spain’s Ono and Germany’s Kabel Deutschland.

However, Vodafone’s deal to buy Kabel Deutschland has run into a snag and the company is now caught up in a lawsuit with activist hedge fund Elliott Management. Elliott is demanding that Vodafone triple its offer price for Kabel.

Waiting for a better offer

Vodafone’s deal to acquire Kabel was completed during October last year via tender offer. Around 77% of Kabel’s shareholders tendered their shares to Vodafone, the rest held out betting on forcing a higher price from Vodafone.

Elliott’s shareholding amounts to around 13.5% of Kabel’s outstanding stock, just enough to influence the deal and call an extraordinary meeting of shareholders. And with close to $25.5bn in assets under management, Elliott is not going to be pushed around.

The fund has filed a lawsuit against Vodafone, demanding that the mobile provider raise its offer for Kabel. Elliott is demanding between €225 and €275 euros per share in cash for its Kabel shares, more than three times Vodafone’s initial offer of €84.53 per share in cash.

Now, usually these demands would fall on deaf ears but Elliott has reason to believe that both Vodafone and Kabel are hiding something from shareholders. 

Secret document 

A couple of weeks ago, Kabel’s  CEO Manuel Cubero noted that, after viewing a report prepared by a special auditor, Vodafone’s offer price for Kabel may not have been appropriate. A statement he later denied making. 

However, while the special auditor’s report does exist, Kabel is refusing to make the document public, stating that sensitive data is contained within the document. Nevertheless, Kabel’s management has stated that the report will be restated without the sensitive information. 

In response to this statement Elliott has claimed, and rightly so, that shareholders have the right to access the auditor’s special report in full, without adjustments.

It seems as if Kabel and Vodafone are trying to hide something. The two companies could be working together to hide the fact that Vodafone’s offer for Kabel significantly undervalues the company.

Major hurdle 

Unfortunately, if Vodafone is found guilty of withholding information from shareholders, in order to acquire Kabel at a knock-down price, the company’s European growth strategy could fall apart. 

Indeed, in the worst case, Vodafone could be forced to compensate all Kabel’s current and previous shareholders with a higher offer. Vodafone has already shelled out around £6bn for Kabel, if Elliott gets its way, this bill could jump to £18bn.

Looking elsewhere

If Vodafone loses its battle with Elliott, the company could be facing a hefty bill or even additional legal action, which could put the group’s dividend payout under even more pressure.