Credit: Mnadi

Vodafone picks up on Liberty, but it's no booty call...

The City's worst kept secret is confirmed, as mobile giant Vodafone admits talks with Virgin Media owner Liberty Global. But it's not what you think...

by Andrew Saunders
Last Updated: 29 Sep 2015

The world’s second largest mobile operator, Vodafone, and veteran US entrepreneur John Malone’s Liberty Global (the biggest cable outfit in Europe) are looking at a potential tie up, the UK firm confirmed overnight.

But the talks are definitely not, insists Vodafone primly, about a full merger, but rather about assets swaps or transfers between the pair. Details of exactly which assets might be involved, or indeed the likelihood of any deal emerging at all, remain under wraps.

So for speculators who’ve been banking on a full takeover - especially since last week’s statement from Liberty’s billionaire US chairman John Malone that the pair were ‘a good fit’, such a relatively chaste arrangement looks like a disappointment. The wedding hats have been put back in the wardrobe for now and Vodafone’s shares dipped some 5p to just under 243p.  

Rumours that Liberty and Voda have been making eyes at each other have been circulating for months, but until now the British firm has refused to comment. So today’s announcement puts the gossip on a rather more official footing, but it also hints at the substantial hurdles facing attempts by the pair to hook up.

Here at MT we reckon that the full merger has proved too hard to manage for a number of reasons. To whit:

Geography. Liberty’s cable assets and Vodafone’s mobile networks in the UK, Germany and The Netherlands are bursting with merger-friendly quad-play ‘synergies’ (up to £1.4bn of them in the first year according to some drooling analysts). But this may not be enough to make Malone want to take on Vodafone’s substantial other businesses in India, Turkey and Africa, which he has previously made clear are of no interest to him.

Size. It would be one of the biggest mergers ever creating a £100bn telecoms powerhouse, so the financing requirements would be massive. Not that that in itself would be a clincher - the money can usually be found if the will to do the deal is there - but there are substantial differences of approach. In a nutshell, swashbuckling Liberty boss Malone likes plenty of leverage and debt, whereas Vodafone’s more conservative and corporate leadership does not.

Who’ll wear the trousers? The question of whose name would be on the CEO’s office were the pair to merge, and what role would there be for 74 year old Malone, are not minor details. Many potentially fruitful unions have foundered on the question of who’s going to be left in charge once the confetti has been thrown.

So what’s left? Asset swaps between the pair would presumably have to centre on the western European sweet spots, where the rapid consolidation of broadband, mobile TV and phone offerings has left both Liberty and Vodafone looking somewhat behind the curve. Shareholders have been pressing Voda CEO Vittorio Colao increasigly hard for an answer to this apparently major strategic oversight.

But such swaps would come with all kinds of tax liability questions too, making them not that much less complicated to execute than the full merger. A European partnership or JV is another possibility which might be fiscally more straightforward at least.

It’s also possible that Vodafone could spin off its emerging markets operations to raise cash to buy Liberty’s European businesses outright. Or even the other way round - Vodafone could sell its UK, German and Dutch businesses to Liberty (a move that would be bound to have huge political ramifications, however, given Vodafone’s UK HQ and status as one the jewels in the nation’s corporate crown).

So rather as in the case of a secret betrothal, while the two central protagonists are keen to tie the knot, the wider family and friends remain much cooler on the union.

Will the happy pair manage make it all the way to Gretna Green and successfully elope, or will they succumb to those disapproving rellies and make do with the odd snatched hour together for the foreseeable future? We’ll just have to wait and see.

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