Should Vodafone Group plc buy Sky plc?

Should Vodafone Group plc (LON: VOD) change the game by taking over Sky plc (LON: SKY)?

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Vodafone (LSE: VOD) decided to sell Verizon Wireless to Verizon Communications back in 2013. This multi-billion pound move reduced the firm’s net debt, and provided it with the opportunity to acquire other businesses.

The telecoms and broadcasting sector has been turned up-side-down in the past decade by a series of sweeping strategic moves. BT Group is taking over Everything Everywhere, becoming the country’s leading broadband supplier and mobile business. It has also entered the pay-tv market, and now owns the rights to Champions League football.

Vodafone has been out-thought by its rivals

Sky (LSE: SKY) still dominates pay-tv in the UK, offering Hollywood movies and Premier League football to its customers, and it has expanded into broadband and now also has companies in Italy and Germany.

This has left Vodafone as the odd one out, seemingly out-thought by its rivals. Its Project Spring aimed to renew the telecoms giant, but it has been strategically out-manoeuvred, and its share price has been moribund for the past few years. There have been a few small purchases, and on and off discussions with Virgin Media owner Liberty Communications, but there has been no big, transformational deal.

So what could it do to make up some of this lost ground? Well, what if it bought Sky?

It would be the dream move, and in one fell swoop Vodafone would be one of the world’s leading pay-tv operators, as well as gaining a substantial broadband business. The company would be able to offer the triple and quad play deals that have gained so much business for its competitors. It would have renewed strength and greater synergies in Europe. And by building up its broadcasting assets it would take the fight to arch-rival BT.

Taking over Sky would be a transformational move

This would be the transformational move that its shareholders were hoping for. But could it ever happen?

Well, there would be several barriers to jump over. First, for a £56bn company to take over a £15bn firm, it would need to sell off some of its others assets, to make sure it doesn’t have too much debt.

Then the deal would require regulatory approval. But I don’t think this would be too difficult to acquire.

And, perhaps the most difficult thing, would be to gain the approval of Sky’s board. Although the synergies are clear, Vodafone may be forced to go hostile, increasing the price it would have to pay.

These difficulties probably explain why Vodafone has not yet launched a bid. It seems, instead, to have settled for a series of smaller deals, such as buying out minority shareholders in Vodafone India, and acquiring Spain’s leading cable operator, ONO.

But to me this seems like tinkering around the edges, and is unlikely to have a dramatic effect on the company’s bottom line. Instead, it may be a gamble, but I think Vodafone should try and change the whole game by acquiring Sky.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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