At the end of last week, I covered Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) “Prisoner’s Dilemma”, Vodafone’s struggle to compete effectively with peers such as BT, which are aggressively chasing customers in the quad-play market. Quad-play packages offer consumers a mobile contract, pay-tv package, broadband and landline connectivity in one package, making the all-in-one package cheaper for the consumer and more convenient.
Soon after I wrote that article, sources inside Vodafone revealed that the company was weighing up a possible bid for Liberty Global, a multimedia empire that owns, among other assets, Virgin Media here in the UK.
Game-changing deal
Unfortunately, the deal between Vodafone and Liberty is still in its early stages and no formal offer has been made. However, the deal, if it went ahead, would completely change the industry.
Liberty Global is the world’s largest cable company, with over 56m video, internet, and voice subscribers, so this would be a huge bolt-on acquisition for Vodafone. But the cost of the deal, as well as regulatory hurdles may stop the deal from going ahead.
For example, Vodafone’s management is reportedly concerned about the about the combined company’s debt levels, if the deal goes ahead. Liberty has a $38bn market cap, and $40.1bn in net debt. Vodafone is worth $95.1bn, and has $34bn in net debt. Depending upon the premium offered by Vodafone, it’s reasonable to assume that the company’s debt would double, or even triple if it went ahead and acquired Liberty.
What’s more, if Liberty and Vodafone combined, the enlarged company would virtually control the multimedia market within some countries. It’s likely that regulators will demand asset sales before a deal can go ahead.
Still, Vodafone and Liberty have been at war for some time now and a deal would remove one of Vodafone’s key competitors. The two media giants fought over Kabel Deutschland last year and Liberty recently announced that it is planning to launch a mobile service to its customers across Europe in the near future — a direct assault on Vodafone.
Multiple concerns
Even though a deal would be beneficial for Vodafone, the company’s management has to carefully weigh up its options and work out the best deal for shareholders. The company is still haunted by its 1999 acquisition of Mannesmann AG, which still holds the record for the largest corporate acquisition in history.
In total, Vodafone paid $203bn for Mannesmann, 56 times earnings, a 72% premium to Mannesmann’s closing share price. Almost as soon as the deal was over it became apparent that Vodafone had grossly overpaid, and within years Vodafone has to write down the value of Mannesmann’s acquired assets by approximately $40bn.
Hopefully, if Vodafone does go ahead and make a bid for Liberty the company won’t make the same mistake. There’s no denying that if a deal went ahead, it would completely change the European telecoms industry and re-ignite Vodafone’s growth.
