Court Orders Re-Examination of German Cable Acquisition

On Aug. 14, 2013, a regional court in Düsseldorf ordered the German cartel office to re-examine the €3.2 billion purchase of the cable firm Kabel BW by John Malone’s Liberty Global.

This decision comes during a phase of ongoing consolidation in the German telecommunications markets, where Vodafone is set to complete its €7.7 billion takeover of the country’s largest cable operator Kabel Deutschland, while mobile network operators E-Plus and O2 are set to consolidate in an €8.5 billion merger. It is also a reminder that Germany’s merger control rules are among the strictest in the European Union.

Both Liberty Global, through its German subsidiary Unitymedia, and Kabel BW supply TV, Internet and telephony services via broadband TV cables to households in Germany. The German cable TV network was established in the 1980s and 90s by the then-state-owned monopoly provider Deutsche Telekom (and its predecessor Deutsche Bundespost). At the end of the 1990s, Deutsche Telekom was privatized and required to spin off its entire cable TV business. It did so by creating several regional cable firms, including Kabel BW, which operates in Germany’s southwest (Baden-Württemberg), and ish and Iesy, which operated in the West (North Rhine-Westphalia and Hesse) and which later merged to become Unitymedia. There have been a number of attempts to re-consolidate the German cable market ever since, but only a few have succeeded. (The latest failure was Kabel Deutschland’s proposed takeover of the smaller rival Tele Columbus, which was blocked by the cartel office earlier this year.)

When Liberty Global notified its intention to acquire Kabel BW in 2011, the deal came under intense scrutiny, first by the European Commission, which originally had jurisdiction over the case, and then by the German cartel office, which had successfully asked for a case referral to the national level. The Federal Cartel Office’s (FCO) concern was that the merger would reduce the number of large regional cable network operators from three to two. However, in order to avoid a prohibition, Liberty offered significant remedies which ultimately alleviated the regulator’s concerns and laid the path for a clearance decision. Among other things, Liberty and Kabel BW agreed to open up large long-term contracts with the housing industry in order to allow competitors to enter the market.

Deutsche Telekom and a small local cable operator believed that the remedy package was insufficient and appealed the clearance decision in January 2012. Now, the Higher Regional Court of Düsseldorf has handed down its decision, siding with the applicants and ordering a fresh review of the merger. Although the reasons of the decision have not yet been published, it is understood that the court has found the cable operators to be monopolies active in separate regional markets— unlike the FCO, which had argued that they were competing with one another at the national level. While the court’s assessment would mean that the merger between Kabel BW and Liberty did not lead to horizontal overlaps, the court has apparently based its decision on the elimination of “potential competition.” Its argument is that the cable networks of Liberty and Kabel BW share a border and that, absent the merger, Kabel BW could have expanded its operations into Liberty’s territory within the next three to five years. This loss of potential competition is not addressed by the remedy package, which is, therefore, insufficient to warrant a clearance.

Liberty has announced that it will challenge the decision before the Federal Court of Justice. However, should the court decision become final, the FCO will have at least four months to carry out a new review. It could then either prohibit the transaction or clear it again, probably subject to more stringent remedies than the first time around.