* Vodafone confirms talks on asset swap — Vodafone has confirmed that it is in
the early stages of discussions with Liberty Global regarding a possible exchange of
selected assets. In what may be anticipating interest from the UK Takeover Panel,
Vodafone has also said that they are not in discussions concerning a combination of
the two companies but we do not believe this is necessarily a permanent state of
affairs. The negative reaction of the Vodafone shares suggests some investors find
an asset swap a rather half-hearted way to exploit the benefits of a possible
combination but it does focus on the major areas of synergy and more may come of
the discussions in time in our view.
* 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.