A German court has blocked Liberty Global's LBTYA 2011 acquisition of Kabel Baden-Wuerttemberg. We think this ranks as one of the worst corporate court decisions ever, though we've seen worse in Russia and other Commonwealth of Independent States countries. The German regulator approved the acquisition before it was allowed to be completed. To come along now, two years later, and say it isn't legal is extreme, in our opinion. Because of Liberty Global's problems in previous acquisition attempts in Germany, the purchase was originally in question, but once the regulator approved the deal, the decision should have been final. Liberty Global will appeal the decision, and we think something can ultimately be worked out, but we are frustrated by the inconsistencies in regulator and court rulings throughout Europe.
This court ruling also brings in to question Vodafone's pending acquisition of Kabel Deutschland, given the acquirer's extensive telecom business in Germany. At a minimum, we expect this will lengthen the review process and delay the closing of the deal. We have not yet included Kabel Deutschland in our Vodafone model, and we won't until the deal closes. For now we are maintaining our fair value estimates and moat ratings for Liberty Global and Vodafone. However, if Liberty Global is forced to sell Kabel Baden-Wuerttemberg, it would probably have a negative effect on our fair value estimate, as it is one of the firm's best-performing assets and provides cost benefits with Liberty Global's other German operation, Unitymedia.
Bulls Say
Vodafone's scale and scope around the world provide cost advantages, as programs can be developed in one market and then rolled out to the rest at minimal additional cost.
The firm generates significant free cash flow, which it is using to increase dividends, make acquisitions, and reinvest in the business. Its free cash flow in 2013 benefited from the $3.825 billion dividend it received from Verizon Wireless in December.
Vodafone's 45% stake in Verizon Wireless is estimated to be worth north of $100 billion before taxes, or more than one half of Vodafone's enterprise value. A tax-efficient disposal could push our fair value estimate higher.
Because the firm is not an incumbent telephone operator, it has no legacy problems like major underfunded pensions, civil servant employees, or regulations mandating universal telephone service.
Vodafone has sold most of its minority assets excluding Verizon Wireless, reducing its debt load and increasing its focus on operations it controls.
Bears Say
Competition is increasing globally, and Vodafone is a target. European rivals are merging and becoming more global, and strong emerging-markets players are developing. This competition is driving down average revenue per user.
Vodafone could overpay for acquisitions, especially if it attempts to gain complete control in Italy. It also potentially has large bills coming for new wireless spectrum being auctioned in many countries.
The Indian government is a thorn in Vodafone's side. After the Indian Supreme Court ruled in Vodafone's favor regarding its $2.5 billion tax dispute with the Indian government for its acquisition of Hutchison Essar in 2007, the government passed a new law retroactive to 1962, requiring the firm to pay the tax.
Governments are mandating that wireless firms lower interconnection and roaming fees, hurting sales and margins.
Morningstar 
Premium subscribers can access the full report here.
.jpg)
