Vodafone is in discussions with Liberty Global regarding a possible exchange of assets, the telco said in a statement today. However, it is not discussing a full-blown merger with the pan-European cable group – a transaction long pitched by…
Vodafone is in discussions with Liberty Global regarding a possible exchange of assets, the telco said in a statement today.
However, it is not discussing a full-blown merger with the pan-European cable group – a transaction long pitched by advisers.
The disclosure follows intense speculation over how a broader deal would be structured, considering that Liberty Global would not have been interested in Vodafone’s assets in Africa and India. The cable group recently stated that it is considering an eventual IPO in the latter market.
Reports have focused on the potential for Vodafone’s German mobile (Vodafone Germany) and cable (Kabel Deutschland) operations to be swapped for Liberty Global’s cable operations in the UK (Virgin Media) and the Netherlands (Ziggo). Neither company would comment on specific assets.
Liberty Global declined comment on Vodafone’s statement, which followed recent comments by Liberty Global’s chairman, John Malone, who said it would make strategic sense to combine Vodafone’s European mobile operations with Liberty Global’s cable networks on the continent.
“We’ve looked at that from our side and there would be very substantial synergies if we could find a way to work together or combine the companies with respect to western Europe,” he said in an interview with Bloomberg in May, but acknowledged that any deal would be difficult.
Malone did not express any interest in Vodafone’s assets in Africa, the Middle East and Asia-Pacific. Analysts have valued those assets at around US$46bn, with a spin-off the most likely scenario.
Liberty Global has cable assets in seven European markets in which Vodafone already has a mobile presence. The largest of these being Germany, the UK and the Netherlands.
Asset swap a “half-hearted” solution
Vodafone’s share price rose overnight on the back of press reports regarding talks with Liberty Global, but today has fallen about 2%, while Liberty Global’s shares are largely unmoved.
“The negative reaction of the Vodafone shares suggests some investors find an asset swap a rather half-hearted way to exploit the benefits of a possible combination but it does focus on the major areas of synergy and more may come of the discussions in time in our view,” Citigroup analysts said in a note to investors.
RBC Capital Markets analyst San Dhillon said that an asset swap would be complicated, saying “our perception that the German assets will be the most sought after, given the potential synergies around cable consolidation”.
Dhillon suggested that for Vodafone to give up Germany, which has a US$31.2bn enterprise value, and swap it for Liberty Global’s UK and Dutch assets, which have a combined US$50bn enterprise value, Vodafone would have to part with cash.
However, the analyst suggested that if Vodafone were to take on Liberty Global’s German assets, with an enterprise value of US$15.3bn, it could pay by selling its UK and Dutch assets, which have a combined enterprise value of US$19.5bn. Dhillion believes this scenario “may be more palatable as the relative enterprise values of the assets swapped are similar”.
