Vodafone-Liberty set consolidation ball rolling

The talks suggest John Malone’s Liberty Global sees better growth opportunities outside Europe © Bloomberg

John Malone, the US billionaire who controls European cable company Liberty Global, once described a potential tie-up with Vodafone as like trying to get a banana out of a jar.

That was two years ago, and the deal never happened. But the companies have in recent weeks reopened talks over an acquisition of some of Mr Malone’s prize assets in continental Europe, raising questions over the future of Liberty Global.

A full-blown Vodafone-Liberty Global combination, which would be worth about £90bn at current valuations, has long been seen as a possibility. Both companies have openly discussed the logic of creating an integrated broadband and mobile phone business to challenge Europe’s largest telecoms companies.

Liberty Global boasts that it has built “the world’s largest international television and broadband provider”, doing cable and media deals across Europe at a steady clip over the past decade.

But the talks to sell a large part of the empire to Vodafone, as opposed to pursuing what analysts have called the “mother of all deals” in the form of a full tie-up, suggests a more pragmatic approach to getting a deal done. It also means, according to people with direct knowledge of the strategy, that the cable company’s management sees better growth opportunities outside Europe.

The sale of assets in Germany and parts of eastern Europe could trigger a series of secondary deals as Liberty Global reshapes itself.

The UK, for example, has been excluded from the discussions even though investors in both companies say a combination of Liberty’s Virgin Media and Vodafone’s UK mobile business would be one of the most compelling opportunities to create value in Europe.

“We wonder why Liberty would wish to end up with a shrunken portfolio heavily weighted to the challenging UK asset [which is] lacking mobile,” says Jerry Dellis, an analyst with Jefferies.

Liberty Global, led by Mike Fries, is weighing a number of options for Virgin Media. These include bidding for 5G mobile spectrum in an auction that could take place as soon as May. Acquiring airwaves would strengthen its hand for a future bid for O2, the mobile phone company owned by Spain’s Telefónica which has tried to sell the business in the past, say people with direct knowledge of the company’s strategy.

Other potential targets include TalkTalk, whose stock price is at an all-time low, or business-to-business telecoms company Daisy.

Some still believe that a Vodafone-Virgin Media deal is inevitable. “There is no way a conversation starts without the UK being at least in the back of their minds. It is the jewel in the crown,” says one person with knowledge of the situation.

Liberty Global’s European strategy has been primed for a rethink ever since the company revealed plans to spin out its Latin American assets, known as Lilac, last year with a view to consolidating that market, say people briefed on the company’s thinking.

The dismantling of Liberty’s empire started in December when it sold its Austrian unit to Deutsche Telekom. It has already merged its Dutch business with Vodafone, and launched a review of its Swiss division last year. A sale of the German, Romanian, Hungarian and Czech assets to Vodafone would leave it as an isolated player in a handful of markets.

Mr Fries told CNBC last month that European cable assets were being sold at a healthy premium of between 11 and 12 times earnings and more consolidation was “inevitable”.

However, some within the industry believe that European cable has peaked. Owners face the prospect of spending billions of euros on network upgrades, such as Virgin Media’s £3bn Project Lightning, or selling to larger companies.

The Vodafone-Liberty talks remain at an early stage and challenges remain. Laura Perez-Martinez, vice-president and telecoms analyst at Moody’s, warns that Vodafone does not have “much room for debt-finance M&A” in pursuing the cable assets. At the same time, Mr Malone and Mr Fries will not want to be landed with a massive tax bill from a clean sale, according to a person briefed on the talks.

Vodafone could launch a rights issue to fund a deal, with the potential value of the assets at €16.5bn including debt. Another possibility is an asset swap that would reduce the upfront outlay. Jonathan Dann, an analyst at RBC, says the company’s 50 per cent holding of the Dutch joint venture Vodafone-Ziggo could be used as a “horse trade” to get the deal done without increasing debt.

Stéphane Beyazian, an analyst with Raymond James, calculates that Liberty Global’s German cable company UPC is valued at £12bn while Vodafone’s stake in the Dutch joint venture is worth £11bn-£12bn.

Such manoeuvring could finally get Mr Malone’s “big banana” out of the jar and transform Liberty Global into an integrated telecoms player in the Benelux markets with options in the UK, Poland, Switzerland and Slovakia. Whether that leaves him with the fruit or merely the peel remains to be seen.

Saturday, 3 February, 2018

This post originally appeared on Financial Times

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