Three hedge funds who tendered shares enabling Vodafone to successfully bid for Germany's largest cable firm plan to sue for a better price for their outstanding holdings, three financial sources with knowledge of the matter said on Friday.
Vodafone (Newbury UK), which wants Kabel Deutschland (Unterfoehring, Germany) in order to offer more television and fixed-line services in its largest European market, said late on Thursday it had secured more than 75 percent of shares in the company, a condition for its 7.7 billion euro ($10 billion), 87 euro-per-share, offer.
Kabel Deutschland's biggest shareholder, Elliott Management, tendered part of its stake in order that the offer should succeed. Now it, along with shareholder hedge funds Davidson Kempner and York Capital, plans legal action in the hope that a court will force Vodafone to offer a higher price in the next stage of the buyout, said the sources with knowledge of the hedge funds' plans.
Elliott, Davidson Kempner and York Capital declined to comment. Vodafone also declined to comment.
Vodafone's original offer for Kabel Deutschland ended on September 11, but Kabel Deutschland shareholders who have not accepted the offer may still do so between September 17 and September 30. Under German takeover law, Vodafone now has to offer a buyout price to remaining shareholders. That buyout price is unlikely to be significantly higher than its original offer and can be challenged in court.
Vodafone's original offer came under fire from U.S. activist investor Paul Singer, founder and CEO of Elliott Management. According to one of the three financial sources, who is familiar with Singer's thinking, the investor believes the offer undervalues Kabel Deutschland, though he has not specified what he sees as an adequate valuation.
Elliott increased its Kabel Deutschland stake to 10.9 percent ahead of the offer deadline. Davidson Kempner holds 3.4 percent. York Capital also holds a Kabel Deutschland stake, one of the sources said, though the hedge fund itself declined to comment on whether or not it did.
The tactic that the hedge funds are pursuing in the Kabel Deutschland deal replicates what Elliott did in the takeover of German crane maker Demag by U.S.-based rival Terex two years ago. That court decision is still pending.
In 2011, Elliott pushed DuPont into raising its offer for Danish food ingredients maker Danisco after building a 10 percent stake.
Vodafone is scheduled to publish details of the number of tendered shares on Monday.
Earlier this month the British company agreed the sale of its stake in U.S. operator Verizon Wireless (New York City, NY, USA) for $130 billion as part of its strategy to focus on its businesses in Europe and emerging markets. The Kabel Deutschland deal is part of their effort to buy broadband assets in Europe to complement their mobile business.
Shares in Kabel Deutschland rose 6 percent on Friday, as investors hoping to benefit from a potential higher payout for their shares, flocked to buy the stock. ($1 = 0.7514 euros)
(Additional reporting by Anjuli Davies; Editing by Sophie Walker)