Vodafone (LSE: VOD) and Liberty Global announced last week that they were holding informal talks regarding potential deals. These potential deals, it later emerged, were a series of asset swaps, which makes a lot of sense.
Vodafone and Liberty are both big players in the European telecoms market, but neither is dominant in a single market. Liberty is a cable company first with a small mobile operation tacked on in many European markets. Meanwhile, Vodafone is a mobile company with some cable assets tacked on.
However, by selling, or swapping certain assets with each other, Vodafone and Liberty will be able to dominate certain markets.
Preferred asset swap
According to City analysts, Vodafone and Liberty would both benefit the most if Liberty exchanged its German assets with Vodafone, in exchange for Vodafone’s UK and Dutch mobile operations.
This transaction would give Liberty a full quad-play offering within the UK — the group already owns Virgin Media — while Vodafone would become a dominant force within Germany.
Swapping assets to dominate different markets is a cunning strategy. Vodafone and Liberty are competing across several of these key markets. A deal will enable the two companies to simultaneously remove a competitor from the market and capture its market share.
No takeover
Some rumours have suggested that John Malone, Liberty’s CEO and founder, has been pushing for a full-blown merger of Liberty Global and Vodafone.
It’s estimated that any deal could yield an estimated £20bn in cost-saving synergies, a huge figure. However, it’s clear that there are many hurdles Liberty will have to jump over before a deal goes ahead.
Indeed, Vodafone and Liberty are both European telecoms giants, combining the two would almost certainly reduce competition across the continent.
Then there are Vodafone’s shareholders to consider.
Different business models
You see, Vodafone and Liberty are both built around two separate business models. Vodafone has kept debt low and returned most of its income to shareholders. While Liberty, on the other hand, has been pursuing an aggressive acquisition strategy funded with debt. The company pays no dividend to investors.
But the majority of Vodafone’s shareholders own the company for its stable dividend payouts and market-leading dividend yield.
According to reports, Liberty has approached several of Vodafone’s top ten shareholders with plans on how the deal will be carried out. And it’s believed that Vodafone’s board has considered a dual-share scheme option — allowing investors to receive healthy dividends but make concessions on a higher level of debt.
While the dual share approach is an attractive way of structuring any takeover, for Vodafone’s shareholders at least, an asset swap strategy is likely to yield the best results.
