2014 was a busy year for Vodafone (LSE: VOD). The company made several large acquisitions across Europe and finalised the sale of its US joint venture to peer Verizon.
But now, some City analysts are starting to become worried the company’s prospects. Specifically, analysts are concerned that Vodafone’s size is holding the company back.
New rivals with wealthy backers are giving Vodafone a run for its money in the company’s key South African and Indian markets. Meanwhile, consolidation within the European telecoms market is forcing the group to spend heavily, in order to keep ahead of its peers.
Needs to do a deal
As a result of these growing pressures, analysts at investment bank Merrill Lynch believe that Vodafone needs to make an offer to buy its European peer Liberty Global in the next few months, and it’s pretty clear why.
In particular, Liberty has become one of Vodafone’s key competitors in the European market and, as the two companies fight over acquisitions, prices are being pushed higher. Removing Liberty would leave Vodafone to dominate the European market.
Additionally, Vodafone would be able to spend longer weighing up possible acquisition targets, without its hand being forced by Liberty.
Liberty is Europe’s largest cable company, and it also has operations in South America. These are two regions where Vodafone would love to increase its exposure.
Vodafone is already trying to improve its offering to customers within Europe through its Project Spring infrastructure project but where it lags peers is in the triple- and quad-play markets. For example, traditionally Vodafone is a mobile operator but customers are increasingly looking for companies that can offer bundled media services. Liberty is one such operator, and more than 40% of the group’s customers are already on triple-play contracts, which bundle together cable television, internet and voice packages.
So, it would certainly make sense for Vodafone to try and buy out Liberty, as a deal would give Vodafone’s European presence a huge boost.
However, Vodafone is running out of time to make such a large acquisition. Analysts believe that Vodafone would have to offer somewhere in the region of $53bn to buy Liberty — a huge sum.
And Vodafone could only afford to make such an offer while credit remains cheap. In other words, Vodafone won’t be able to pounce on Liberty when interest rates start to rise.
Progress at home
Still, if Vodafone doesn’t make a bid for Liberty, it’s not the end of the world. Thanks to the company’s drive to modernise its European telecommunications network and capture more customers here in the UK, City analysts believe that Vodafone’s earnings are set to expand by 23% during 2017 as the company’s investments start to pay off.