Vodafone (LSE: VOD) surged to a 52-week high last week after comments from John Malone, chairman of cable group Liberty Global, that hinted at a possible merger between the two groups.
Takeover speculation has surrounded the two groups for some time. However, until last week there had been no comment from the companies themselves. But that all changed when Mr Malone said that Vodafone would be a “great fit” with his cable empire in Western Europe.
What’s more, Mr Malone seems to have put some serious thought into the matter stating that:
“We’ve looked at that from our side and there would be very substantial synergies if we could find a way to work together or combine the companies with respect to Western Europe,”
Not a done deal
Even though Liberty Global seems to have put some serious thought into a potential tie-up with Vodafone, a deal is unlikely to go ahead anyntime soon. There are just too many barriers in the way of a potential deal.
And the biggest obstacle will be the sheer size of the enlarged group. A merged Liberty-Vodafone would create a global behemoth with an enterprise value of more than $140bn.
The new group would dominate Europe’s pay-television, broadband and mobile phone markets, a move that is bound to attract the attention of regulators.
Break up ahead
Most analysts agree that Vodafone and Liberty are unlikely to merge in their present forms. Aside from regulatory issues, Vodafone has too much debt to acquire Liberty outright, and Liberty is unlikely to pounce on Vodafone for the same reason.
Nevertheless, Vodafone could unlock value from its emerging market assets through a sale or spin-off, freeing up cash for the acquisition of Liberty.
It’s estimated that the resulting merger of European operations after Vodafone divests its emerging market assets, could produce about $20bn in synergies.
Different strategies
Aside from the financial constraints blocking a deal between Liberty and Vodafone, Mr Malone believes that there is an enormous operational strategy void separating Vodafone and Liberty, which could prevent any deal.
In particular, Liberty is an aggressive acquirer. The company has made €36bn of cable acquisitions across Europe since 2010. Over the same period, revenues have doubled, and shareholder equity has quadrupled.
Liberty doesn’t pay a dividend and reinvests all profit back into the business.
On the other hand, Vodafone returns most of its profit to shareholders through dividends. Over the past five years, the company’s sales have declined by around 15% and shareholder equity has shrunk by 20%.
Liberty’s approach has produced the best returns for investors. Indeed, over the past ten years the company’s shares have produced a total return of 18% per annum.
In comparison, Vodafone’s shares have returned 7% per annum for the past ten years.
