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Vodafone-Liberty Global Deal Is End Game of Their Duel: Real M&A 2014-09-16 23:00:01.3 GMT

(For a Real M&A column news alert: {SALT REALMNA <GO>}.)

By Amy Thomson and Kristen Schweizer Sept. 17 (Bloomberg) -- If Vodafone Group Plc and Liberty Global Plc really want to dominate the phone, cable and wireless market in Europe, they should quit competing and try merging. The companies were among large cable and phone operators that gobbled up smaller players in more than $200 billion of European deals since 2011 to gain customers and market share. A merger of Vodafone and Liberty would be the next logical step, according to Bank of America Corp. Vodafone Chief Executive Officer Vittorio Colao told Bloomberg News last week that John Malone’s Liberty could be a good fit at “the right price.” A deal would create the biggest company in Europe selling bundled packages of mobile, phone, Internet and TV services. A combined company could see a 3.2 percent jump in earnings per share from the deal by next year, were Vodafone to offer London-based Liberty a 20 percent premium, or more than $80 billion including debt, and pay for half in cash, according to Erhan Gurses, an analyst at Bloomberg Intelligence. Acquirers paid an average premium of 20 percent for cable assets in the last five years, he said. “It makes a ton of sense because Vodafone just bought cable companies in Germany and Spain and there’s the sense that once you start on this track you don’t stop,” said Amy Yong, a media analyst at Macquarie Capital in New York. “At the end of the day, Malone is not emotional about business. He’s rational, and at the right price he would obviously let Liberty go.”

Quad-Play

Selling mobile services alongside “fixed” offerings such as TV and Internet access in quad-play packages helps carriers generate more revenue and makes it less likely that a customer will leave. That’s vital for companies like Newbury, England- based Vodafone that have been struggling with oversaturated markets in Europe and sluggish economies that are eating into revenue. Even in the U.K., Vodafone’s home market, the wireless operator is only the No. 3 mobile provider. Liberty, which has forged resale agreements with wireless providers, has also found that adding mobile service to its broadband and video packages cuts customer defections and increases sales, CEO Mike Fries said last week, appearing at the same New York conference organized by Goldman Sachs Group Inc. at which Colao spoke. “It makes perfect sense why Vodafone would buy cable,” Fries said. “We’ve looked at mobile operations in a number of countries and, for us, it’s a different equation,” with more of a focus on resale agreements as opposed to purchasing mobile networks outright.

Good Fit

Vodafone and Liberty aren’t in discussions about a deal now, two people familiar with the companies’ plans said. That’s in part because Malone’s price is too high, one of the people said, asking not to be named discussing confidential information. Liberty, with a market value of $33 billion, considers Vodafone a good fit because of its European footprint, the other person said. Vodafone, valued at $87 billion, is particularly interested in Liberty’s German unit, Unitymedia KabelBW, another person with knowledge of the company’s plans said. Even if a deal isn’t imminent, the benefits of combining efforts and increasing coverage in countries such as the U.K., Germany and the Netherlands are “compelling,” Macquarie’s Yong wrote in a Sept. 11 report. “Outside of Liberty, there aren’t any major assets to acquire,” said Paul Marsch, an analyst at Berenberg Bank in London. While European Union regulators are encouraging companies to create networks that span the continent, they haven’t been as accepting of bids that merge networks within countries, leaving acquirers such as Vodafone with fewer places to go, Marsch said.

Dueling Deals

Vodafone already beat out Liberty with a bid for Germany’s Kabel Deutschland Holding AG last year. Vodafone then went on to buy Spanish broadband company Grupo Corporativo Ono SA this year. For its part, Liberty agreed to buy Dutch cable operator Ziggo NV in January and a stake in ITV Plc, the U.K.’s biggest commercial broadcaster, in July. Vodafone is also spending 19 billion pounds ($31 billion) through March 2016 to improve its network, adding faster broadband lines and upgrading mobile service globally. The investment is funded with cash from the sale of its stake in Verizon Wireless for $130 billion. While those investments are expected to cut into profit, Vodafone has said it would be willing to increase its debt levels for the right deal.

‘Mega’-Synergies

The combined companies could plausibly expect “mega” synergies with a net present value of 20 billion pounds, according to a note sent to clients last week from Bank of America’s BofAML Special Situations Desk. “Liberty would be the logical next step for Vodafone,” according to the note. Vodafone faces an “existential threat” from the rise of quad-play, which often drives down the cost of mobile service. “For a mobile-only operator this is potentially catastrophic,” the analysts wrote in the note. “By acquiring fixed-line assets, mobile operators are better able to bundle in fixed line to protect revenue.” The deal also would increase the companies’ reach in Germany, where Vodafone and Liberty’s assets are limited to regional coverage, and will give Vodafone an Internet product for consumers in the U.K., “one of the biggest gaps in its market,” the analysts wrote. For Liberty, now may be an opportune time to sell to Vodafone, before the wireless giant moves ahead with its investment plans, they wrote.

Tax Benefits

Beyond giving Vodafone access to TV and Web customers, Liberty has about $5.5 billion in tax assets built up from net operating losses and capital allowances from spending on its business, according to Macquarie’s Yong. Malone’s not likely to sell cheap. Berenberg Bank’s Marsch says the billionaire may demand about $45 billion in a sale -- a 36 percent premium to the company’s market value today. “That’s probably a stretch too far for Vodafone,” he said. Still, a combination would give Vodafone the access it needs to fixed-line services in its biggest European markets. Liberty, meantime, would be combining with the biggest mobile phone company outside of China, by customers. Vodafone has more than 125 million subscribers in Europe, including 32.3 million in Germany and 19.5 million in the U.K., major markets for Liberty. Any deal would likely mark the final step in consolidation for Liberty and Vodafone, said San Dhillon, an analyst at RBC Capital Markets, a unit of Royal Bank of Canada. “It would be hard to see Vodafone needing to do any further deals” after Liberty, Dhillon said. “That would be the end of their acquisition spree.”

For Related News and Information: Vodafone CEO Says Liberty May Be Good Fit for ‘Right Price’ NSN NBR9ZK6VDKHU <GO> Phone Operators Implore Europe to Facilitate Domestic Deals NSN N573DJ6JTSEN <GO> Malone’s Liberty Vies With Vodafone for Europe Cable Assets NSN N04GQI6K50YL <GO> Today’s top technology news: TTOP <GO> Deal data: MA <GO>

--With assistance from Scott Moritz in New York and Cornelius Rahn in Berlin.

To contact the reporters on this story: Amy Thomson in London at +44-20-7392-0662 or athomson6@bloomberg.net; Kristen Schweizer in London at +44-20-7330-7526 or kschweizer1@bloomberg.net To contact the editors responsible for this story: Beth Williams at +1-212-617-2307 or bewilliams@bloomberg.net; Kenneth Wong at +49-30-70010-6215 or kwong11@bloomberg.net Whitney Kisling

China's Central Bank Injects $81 Billion Into Top Banks to Counter Slowdown PBOC Stimulus Follow Slew of Disappointing Economic Data

The People's Bank of China headquarters in the financial district of Beijing. Bloomberg News BEIJING—China's central bank is injecting 500 billion yuan ($81 billion) into the country's five major state-owned banks as it moves to counter slower-than-expected growth in the world's No. 2 economy, according to a senior Chinese banking executive.

Related Coverage Beijing's Balancing Act China's Industrial Production Growth Slumps China Foreign Direct Investment at Four-Year Low The move shows that Beijing is continuing to use targeted measures—as opposed to a broad-brush stimulus plan—to spur the economy. But economists warn that Beijing may face growing pressure to adopt more broad-based stimulus measures if momentum weakens further.

The injection from the People's Bank of China 601988.SH -1.10% will be in the form of a three-month, low-interest-rate loan to the banks, said the executive, who was briefed on the decision. The PBOC will pump 100 billion yuan each into Industrial & Commercial Bank of China Ltd. 601398.SH +0.28% , China Construction Bank Corp. , Agricultural Bank of China Ltd. 601288.SH -0.80% , Bank of China Ltd. and Bank of Communications Co. 601328.SH +0.23% , the executive said.

While there are no explicit conditions attached to this targeted lending, the PBOC is expected to guide the big banks to channel credit into areas the government has deemed as important to the economy, such as public housing and private and small businesses, the executive said.

The move has a similar impact as a 0.5-percentage-point cut in the amount of reserves China's commercial banks set aside with the People's Bank of China. But a reserve-rate cut would be seen as a broader-based, longer-lasting move, and Chinese officials would have less say in where the money ended up.

Officials at the Chinese central bank have been arguing that drastic easing measures such as a cut in interest rates might cause a flood in lending that would worsen China's debt problems and put the economy at greater risk. In a commentary published late Tuesday, China's official Xinhua News Agency said calls for an interest-rate cut amount to a vote of no confidence in China's reform efforts, hinting that Beijing wouldn't go back to its old playbook of embarking on broader stimulus to revive the economy.

"There remains big pressure [on the PBOC] to loosen credit, so it's entirely likely that it will do more targeted easing in the coming months," said Zhang Bin, a senior research fellow at the Chinese Academy of Social Sciences, a government think tank. "But the likelihood of a broader loosening of monetary policy is small."

Still, some economists argued that the move won't directly address economic headwinds such as weakening domestic demand and a slumping property market.

A credit official from Bank of China said loan demand has been sagging over the past two months given the cooling economy. The official said the injection was unlikely to boost lending significantly because of weak demand from borrowers.

The move is "unlikely to boost market sentiment as it will not effectively improve demand for loans," said Standard Chartered economist Li Wei. "We're not supportive of this continuous use of targeted easing. They need something bigger to turn the market sentiment around."

Benchmark Chinese stock indexes fell on the news early Wednesday, but shares in Hong Kong rose on the central bank's move.

The PBOC move comes as China faces growing economic hurdles. Growth in industrial production year on year in August hit a six-year low, while foreign direct investment last month hit a four-year low. Factory sentiment, fixed asset investment and retail sales are seeing weakness as China's real-estate market slumps.

China's economic growth has already slowed to 7.5% in the second quarter compared with a year ago and 7.4% in the first quarter, an 18-month-low. In the fourth quarter of last year, growth came in at 7.7%, and in previous years growth rates were much higher.

"This year Chinese policy makers seem more reluctant to adopt broad-based easing as they try to avoid stimulating the economy, but it appears to have only delayed the action," Citigroup economist Shen Minggao wrote in a report.

In public, China's leadership has maintained a calm stance. Last week in the Chinese city of Tianjin, Premier Li Keqiang told investors at a meeting of the World Economic Forum that the country was set to meet its annual growth target of about 7.5%, structural reform was on track and the country would continue its targeted stimulus measures without resorting to printing money.