SOME of the biggest investors in Vodafone say they are open to a European tie-up with Liberty Global, as the British company is now in a stronger position to negotiate a deal with John Malone’s cable group.
Shares in the world’s second largest mobile operator hit a 14-year high last week after Liberty’s billionaire chairman Malone said a much-mooted union would be a “great fit” for his company.
The positive reaction stands in contrast to previous occasions when talk of a deal sent shares in Vodafone tumbling on fears that it, as the suitor, would overpay in order to snare Liberty, Europe’s biggest cable operator.
“There is a strategic rationale to the combination of the assets,” one top 10 shareholder in Vodafone told reporters on condition of anonymity.
“And until last week, the market assumption had been that Vodafone was coming from a position of weakness. What has changed with John Malone’s comments is that the conversation between the two parties might actually be a more equal one.”
Vodafone, which has 446 million mobile customers in countries ranging from Albania to Ireland, Qatar, India, South Africa and New Zealand, has lost ground to some rivals in an industry-wide trend to provide internet broadband, TV, home phone and mobile services in one bundled product, known as quad-play.
It has already bought cable networks in Spain, Germany and Britain, with the higher-capacity network also helping to carry its mobile traffic. But some analysts believe a purchase of Liberty Global could enable the two companies to create the leading network in Europe in one go.
Liberty has also recently bought a mobile operator in Belgium, in a change of strategy after previously suggesting it did not need to own its own mobile operations and could instead rent capacity from rivals.
Liberty has a market capitalisation of about $49bn and Vodafone’s is around £67.3bn.Analysts estimate that a deal could result in gross synergies of around £16bn ($24bn).
Malone’s comment, in an interview to Bloomberg, that there would be “very substantial synergies” if they could find a way combine the businesses “with respect to western Europe” has also sparked speculation that Vodafone could demerge its faster-growth emerging market operations to make it happen.
Two top 20 investors at Vodafone and four smaller investors said they would not want to see the group feel pressured to offload assets quickly and cheaply to hold Malone’s interest.
“Liberty are still fractionally more in the driving seat but the deal makes strategic sense for both parties ... For the perfect quad play, they need Vodafone as much as Vodafone needs them,” one investor said, who declined to be named in line with his firm’s media policy.
“There’s no way Vodafone should let go of the AMAP business purely in the hope of striking a deal. Everything would have to happen together,” the investor said, in reference to Vodafone’s Africa, Middle East and Asia Pacific business.
Some shareholders, who said they had raised the merger idea directly with the company in recent weeks, said executives were surprisingly open to talking about its merits and drawbacks.
There are many barriers to the deal. The two companies only have overlap in a few countries, including Britain, Ireland, the Netherlands and Germany and of those, only two are big enough to warrant such a deal.
Malone himself also noted that there are philosophical issues with the way the firms are run, with Vodafone relatively lowly leveraged and paying dividends, while Liberty has high debt and prefers buybacks.
Vodafone, with its relatively corporate brand, also likes to tout its broad geographical spread to enable it to offer global coverage to multinational firms.
Still, investors say Vodafone is looking at its options after Malone signalled the change of tone. If a full merger proved too complicated, the two sides could look at country by country deals such as in Britain where Vodafone could partner with Liberty’s Virgin Media.
“I would say that this has been prime focus in the Vodafone boardroom for some time now,” said David Lis, chief investment officer in equities and multi assets at top 20 shareholder Aviva Investors.
“They must have done a huge amount of work understanding Liberty. It is an open secret, it is much discussed that they are the last people who could do a deal if Vodafone are to bring their business to a wider platform.”
Given Vodafone’s strategic challenges, dividend fans in its shareholder base are unlikely to oppose a sensibly structured
deal that offers some token income, the investors said, confounding earlier speculation that many could balk at Liberty’s high leverage and preference to reward with buybacks instead.
“It is starting to look like a company that is under a bit of pressure and a merger might alleviate some of that pressure,” said Chris White, head of UK equities at Premier Asset Management, which is a Vodafone shareholder.
“But it would probably be dressed up with a dividend cut, in other words, Vodafone would start to be looked at as an
equity growth company rather than an dividend income story.”
Vodafone declined to comment.