Key Call: Vodafone Group - Looking at Liberty Global deal scenarios
* Synergies from a broader deal could be significant
With Vodafone and Liberty Global (not rated) having received conditional clearance from the EC for the merger of their Dutch assets, investor focus is now switching back to the prospect of both companies revisiting a broader deal. Strategically a deal would create a leading converged fixed/mobile operator across Europe. We estimate cost synergies from a broader deal could have an NPV of €15.6- 23.4bn for 100% with a further €6.4bn of potential upside from tax synergies. Assuming a 50% share for Vodafone, we believe this would be worth up to 47p per share for Vodafone.
* Liberty Global incentivised to accelerate EBITDA growth or undertake M&A
Amongst the various alternatives we think either a ‘merger of equals’ or an acquisition of Liberty Global by Vodafone could be >10% accretive to Vodafone EFCF longer-term. Looking at incentives for Liberty Global management, according to company filings they are incentivised to either accelerate EBITDA (OCF) growth to >6% pa over the next three years (H1-16 was +2%) or undertake a deal that would result in a change of control (either from an acquisition or merger). Vodafone management incentives are geared towards significantly growing EFCF over the coming years.
* New EUR denominated forecasts - EFCF to ramp over the coming years
With Vodafone switching to EUR rather than GBP based reporting, we publish new EUR forecasts for the company. Outside of the change in reporting currency, our underlying estimates for Vodafone are broadly unchanged. UBSe assume +4% underlying EBITDA growth for FY-17 rising to 6-7% pa thereafter as the core European business (2/3 of Vodafone) benefits from growing mobile data usage and ‘more for more’ price changes. Combined with an easing working capital drag, this should drive a ramp in EFCF from €4.2bn in FY-17E to >€7.0bn for FY-19E onwards.
* Valuation: PT based on SOTP/DCF
Vodafone offers a 7% EFCF yield and >5% dividend yield on a calendarised basis for 2017E. We think recovery and operational gearing in Europe have been underestimated and that the current share price factors in little for M&A upside potential. Note that our PT of 310p does not include any M&A upside, and our base case assumes nothing incremental (either in our SOTP or our estimates) for the Dutch JV.