Is Vodafone Group plc Really About To Launch A Takeover Bid For Sky PLC?

Royston Wild explains why Vodafone Group plc’s (LON: VOD) rumoured purchase of Sky PLC (LON: SKY) makes perfect sense.

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Rumours that mobile services giant Vodafone (LSE: VOD) (NASDAQ: VOD.US) is preparing a bid for British broadcaster Sky (LSE: SKY) has been doing the rounds for many months now, a logical sum given that M&A activity in the telecoms space is rapidly heating up. But chatter in the City has now reached fever pitch, with many touting that a takeover could be launched in the coming weeks.

Any move would represent an impressive counter-strike against fellow telecoms titan BT Group (LSE: BT-A) (NYSE: BT.US), which has parked its tanks on Vodafone’s lawn by re-entering the mobile phone space. The business is engaged in talks to acquire the UK’s largest mobile services provider EE for a colossal £12.5bn, a huge step in boosting its own ‘quad-play’ network.

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Another key to unlocking Europe

So Vodafone’s potential acquisition of Sky would make similar sense. Indeed, the company has already illustrated its ambition in the multi-services sector through its purchase of Kabel Deutschland — Germany’s largest cable provider by subscriber base — late last year for £6.6bn.

And Vodafone added to this by snapping up Spain’s Ono for £6bn in March, the country’s second-largest provider of TV, phone and internet services.

Vodafone clearly sees expansion on the continent as a critical long-term growth driver, and any potential purchase of Sky would satisfy this strategy as well as boosting its fortunes in the UK. Sky has bought out its partner operator Sky Italia, as well as a majority holding in Sky Deutschland, in recent months for a combined £7bn. The enlarged business now boasts 20 million customers across five countries.

Plentiful cross-selling potential

And as Sky points out, more than 60 million customers across its key markets of Britain, Ireland, Germany, Italy and Austria do not currently take pay-TV services, providing plenty of product penetration opportunities for Vodafone. And when you throw in the cross-selling opportunities for the latter’s mobile packages, Vodafone’s earnings prospects go through the roof.

The business is in urgent need of a boost to turn around its enduring problems on the continent, making a continuation of its aggressive acquisition policy a necessity in my opinion. Vodafone noted in November’s interims that organic service revenues in Europe slumped 6.5% during April-September to £13.1bn, caused by rising regulatory pressure and intense competition.

Still, Vodafone noted “growing evidence of stabilisation in a number of our European markets,” no doubt owing to the company’s vast investment in the region. On top of its takeover strategy, the business has also wheeled out a £19bn organic investment scheme — entitled Project Spring — to resuscitate its performance in Europe.

Could Vodafone bag a bargain?

Vodafone undoubtedly has the financial firepower to initiate a takeover of Sky, and promisingly the latter’s shaky financial platform may allow Vodafone to walk away with a terrific deal — indeed, Moody’s downgraded Sky’s credit rating last month after the Brentford firm’s European expansion doubled its debt to around £7bn.

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