* Comments from Liberty Founder opens up the options — Speaking to
Bloomberg on 19 May, John Malone, Liberty Global Chairman, compared parts of
Vodafone to a big banana and doing the right deal (for Liberty) to getting your hand
out of the jar with the banana. We take this to mean that some of Vodafone is of
interest, but not all. Dr Malone talked of “very substantial synergies if we could find
a way to work together or combine the companies with respect to Western Europe”
and specifically cited the UK, Netherlands and Germany. We find these comments
encouraging for the prospects of a deal and retain Buy ratings on both stocks.
* Synergy of £1.4bn (+25%) in annual FCF — In Time to Ring the Liberty Bell? we
argued there is compelling industrial logic behind a potential combination of Vodafone
and Liberty Global and estimated synergy benefits in the first year of full delivery of
£1.3bn pa in OpFCF, £1.4bn in FCF. These estimates are not materially changed by
the revisions to our Vodafone forecasts in this report. We provided scenarios for an
all-stock acquisition of Liberty by Vodafone as the cleanest route to a combination.
* Alternative structures partition the key assets — In the interview Dr Malone
cited a “philosophically different” view of large company capitalisation between
Liberty (stock buybacks, higher leverage) and Vodafone (dividends, lower leverage).
To avoid compromising either set of shareholders unduly we see options to partition
and merge part or all of Vodafone Europe with part or all of Liberty. This would
require restructuring and decisions on credit stance with broader ramifications.
* Vodafone outlook post results — Vodafone expects revenue and EBITDA to grow
organically in FY16 albeit further improvement in the organic revenue growth will
slow in the next two quarters. Following an upbeat appearance by the CFO at a Citi
sales presentation on 19 May, we expect the stock to be supported during the
management’s roadshow. We revise forecasts with EBITDA barely changed but a
higher tax charge leading to a 7-8% reduction to EPS in FY16 and FY17. FX
benefits to Mar 15 net debt lead to a higher target price of 265p (previously 250p).