AsVodafone(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 SpainsOnoand GermanysKabel Deutschland.
However, Vodafones deal to buy Kabel Deutschland has run into a snag and the company is now caught up in a lawsuit withactivist hedge fund Elliott Management. Elliott is demanding that Vodafone triple its offer price for Kabel.
Waiting for a better offer
Vodafones deal to acquire Kabel was completed during October last year via tender offer. Around 77% of Kabels shareholders tendered their shares to Vodafone, the rest held outbetting on forcing a higher price from Vodafone.
Elliotts shareholding amounts to around 13.5% of Kabels 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 alawsuit against Vodafone, demanding that the mobile provider raise its offer for Kabel.Elliott is demandingbetween 225 and 275 euros per share in cash for its Kabel shares, more than three times Vodafones initial offer of84.53 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.
A couple of weeks ago, Kabels CEO Manuel Cubero noted that, after viewing a report prepared by a special auditor, Vodafones offer price for Kabelmay not have been appropriate. A statement he later denied making.
However, while the special auditors report does exist, Kabel is refusing to make the document public, stating that sensitive data is contained within the document. Nevertheless, Kabels management has stated that the report will be restated without the sensitive information.
In response to this statement Elliott has claimed, and rightly so, thatshareholders have the right to access the auditors 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 Vodafones offer for Kabel significantly undervalues the company.
Unfortunately, if Vodafone is found guilty of withholding information fromshareholders, in order to acquire Kabel at a knock-down price, the companys European growth strategy could fall apart.
Indeed, in the worst case, Vodafone could be forced to compensate all Kabels 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.
If Vodafone loses its battle with Elliott, the company could be facing a hefty bill or even additional legal action, which could put the groups dividend payout under even more pressure.
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