Vodafone/Liberty Global UK-only combination within reach – bankers
- BT acquisition of EE adds pressure for UK combination
- UK only deal less complicated than UK/German asset swap
- Valuation differences remain key obstacle
There is increasing impetus for a combination of Vodafone [LON:VOD] and Liberty Global’s [NASDAQ:LBYTA] UK businesses, two bankers familiar with the companies’ strategies said.
The strategic rationale for Liberty’s Virgin Media and Vodafone’s mobile-focused businesses to combine is more pressing now than when a UK deal was mooted in early 2016, the bankers said.
Last year, Vodafone and Liberty discussed deals in Germany and the UK but could not agree on price, a source close to the situation said.
While Vodafone has had a consumer broadband offering since 2015, the acquisition of EE by BT Group [LON:BT.A] has given the latter a head-start in the fixed-mobile bundle market, the bankers said.
The prospect of Vodafone exiting or having a minority stake in its home market is no longer a controversial idea, as it is seen as one of Vodafone’s least attractive prospects, the bankers said.
Vodafone’s results for the six months to end-September 2016 showed it made a loss in the UK but grew in Europe overall.
Investors would not take issue with Vodafone exiting the UK, a top 10 shareholder in the company said. The business is understandably expected to be valued at a discount to other European markets, the shareholder said.
However, catalysts that encouraged a Liberty-Vodafone joint venture (JV) in the Netherlands are unlikely to have the same impact in the UK, the bankers said. The T-Mobile Netherlands sale process, which forced Liberty to consider its options in the country, provided the backdrop for its JV with Vodafone there, the bankers noted.
O2 UK – whose sale to Hutchison Whampoa [HKG:0013] lapsed last year - provides an alternative mobile target for Liberty, the bankers said. But, the network is not as attractive to Liberty as Vodafone’s, the bankers said.
The launch of Sky Mobile was also anticipated to further increase competition in the UK market and add to the strategic rationale for a Liberty/Vodafone UK deal, the bankers said. While it may be a consideration, the launch this month has not been met with as much fanfare as expected, the bankers noted.
Additionally, the risk of Sky [LON:SKY] acquiring O2 and creating a rival multi-play provider has subsided for now with the satellite company’s sale to 21st Century Fox [NASDAQ:FOXA], the bankers said.
The latest message from Vodafone to its shareholders is that deals with Liberty in the UK and Germany continue to make good sense but that the difficulty lies in agreeing a price, the shareholder said.
Advisers can also be expected to pitch a UK-German asset swap, the first banker said. In this scenario Liberty would sell its German business, Unitymedia, to Vodafone in exchange for Vodafone UK, the banker said.
However, greater valuation disparities in Germany and regulatory concerns there make this much more complex than a UK-only deal, the bankers agreed.
Vodafone has indicated, however, that it thinks merger control issues in Germany are surmountable, the shareholder said.
Even in the UK, which the bankers believed is the most likely national deal, there will likely be some disparity in Vodafone’s valuation, the shareholder said. Vodafone will be looking for an offer valuing the company at 6x EV/EBITDA, while Liberty can be expected to offer from 5x, the shareholder thought.
Liberty Global and Vodafone declined to comment.