Broker consensus
CITI
Which banana to swap for which? — The companies have operational overlap in seven Northern and Eastern European countries (Figure 3).
– Germany to Vodafone? — Relative size locally and preservation of tax assets (see Time to Ring the Liberty Bell?) point to Vodafone as the acquirer in
Germany.
– UK to Liberty? — Liberty is bigger than Vodafone in the UK and Ireland in EBITDA terms (though smaller by revenue) and its Virgin Media operation could
be instrumental in improving the profitability of Vodafone’s low margin UK mobile assets, partly by bringing its MVNO on net. Liberty also has sizeable UK tax
losses. However, Vodafone may wish to retain part of the C&W legacy assets to serve its enterprise customers. We see the largest synergy here.
– Netherlands to Liberty? — Liberty has the larger of the two’s assets in the Netherlands and the possibility of addressing synergy across the border with
Telenet in Belgium.
How to address an even division — This split in Northern European would advantage Liberty with Vodafone passing over £2.6bn in EBITDA (post 50% of the
synergy on our numbers - Figure 3) while Liberty hands back less than half that at £1.25bn. However to make up the difference, in our view Liberty could include its
assets in Eastern Europe and Switzerland (possible Austria too).
Switzerland and Eastern Europe — Liberty’s asset in Switzerland, while cable only, as a well invested fixed line player has the potential to take part in
convergence lines consolidation there in our view and also borders Vodafone’s assets in Italy and Germany. For Vodafone the Eastern European assets, while only
modest in size, could make its assets there more saleable by turning them into converged operators. In combination these would make the trade more even with
Liberty notionally providing £2.3bn in EBITDA for Vodafone’s £2.6bn, leaving matters of capital intensity and tax aside for now.
UBS
Focus likely to be on three key markets
Following press reports, VOD released a statement saying it is in early stage talks with LBTY over asset swaps, but is not in talks over a merger. LBTY has previously
highlighted UK, Germany and the Netherlands as the three key areas of overlap where notable synergies could be achieved.
VOD to swap UK/Netherlands for Germany?
Looking at the different permutations for asset swaps, we think both LBTY and VOD may be reluctant to divest of their largest units - UK and Germany respectively. One
solution could be for VOD to swap their UK consumer (50% of UK) and Dutch business for LBTY's German cable unit UnitymediaKBW. On a stand-alone basis, we value VOD
UK at £9.2bn ($13.8bn) for 100% and VOD NL at £2.7bn ($4bn). Assuming 10x annualised Q1-15 EBITDA, the implied value for LBTY DE would be £9.7bn ($14.6bn).
EC likely to review any deal
On regulatory clearance, the FCO in Germany could be a challenge given they would potentially view it as two-to-one consolidation in cable. However, we believe
jurisdiction for a deal involving asset swaps in three European markets would likely reside with the EC that are more likely to look at a broader definition of the market
that includes both fixed/mobile combined.
Valuation: PT based on SOTP/DCF
We think asset swaps could be a positive outcome for both VOD/LBTY – both companies can extract synergies and offer a converged fixed/mobile proposition
without having to pay a significant premium for the entirety of the other.Fundamentally we remain positive on VOD given upside risk to estimates from market
repair/growth in mobile data.