Vodafone to buy German cable company Kabel Deutschland

Vodafone has agreed to buy Germany's largest cable operator Kabel Deutschland for 7.7 billion euros ($10 billion), adding TV and fixed-line services to help defend against mounting competition in its most important market.

In Vodafone's largest deal in six years and its second major buy of a European fixed-line network in 12 months, the group is offering a near 40 per cent premium to Kabel's share price before its interest first emerged in snapping up the target's 8.5 million connected homes.

The high price shows the desire of the world's second-largest mobile operator to adapt in its core market of Europe, where increasing regulation and recession have hit revenue and forced it to write down the value of its assets.

The price was pushed up in the last week by an approach from John Malone's Liberty Global, which could still return with a higher bid, but two sources familiar with the German group said they did not expect that to happen.

"Although you should never underestimate someone as aggressive as Malone, it is very difficult to see how Liberty could make a bid in cash that would be higher than what KDG (Kabel Deutschland) already considers a good price," one of the sources said.

So-called "quad-play" services offering TV, broadband, mobile and fixed-line telephony have caught on rapidly in markets such as France and Spain, but the largely fragmented German cable market is still some way behind, meaning a deal could enable Vodafone to steal a march on rivals such as Liberty's Unity Media and Deutsche Telekom.

With consumers wanting to watch TV and video on an array of devices, cable assets have become more attractive as they can provide internet services at speeds often five times faster than competing services from traditional telecom companies.

"The value of infrastructure is now in focus with telecom companies and cable providers increasingly in competition with each other," Andreas Mark, a portfolio manager with Union Investment, a shareholder in Kabel Deutschland, said. "Clients want a stronger network and better performance."

Malone's Liberty Global has been the most active acquirer in Europe in the last few months, buying Virgin Media and increasing its stake in Dutch group Ziggo, stretching its balance sheet and perhaps hampering its options in Germany.

Liberty could seek to merge Unity Media with Kabel Deutschland, but this would likely be a more complicated deal that would take longer to be approved by regulators.