VODAFONE could show that size isn’t everything in M&A. The British mobile operator is in talks to buy some European assets from Liberty Global, chaired by cable cowboy John Malone, after previous attempts at a merger stalled. Excluding the two sides UK business reduces synergies but also lowers regulatory and financial barriers.

It’s no secret that Vodafone boss Vittorio Colao is interested in the $30 billion cable group. Rival telecom giants — including BT in the United Kingdom and Germany’s Deutsche Telekom — increasingly bundle mobile, TV and broadband internet together to cross-sell services to customers and make them less likely to switch providers. Vodafone and Liberty Global have complementary businesses in Germany, Britain and eastern Europe.

But forming a near-$115bn giant would be challenging. Vodafone operates with less debt and pays a dividend, while Liberty has higher leverage and rewards shareholders through buybacks. Talks of an asset swap in 2015 came unstuck in part over difficulties agreeing a valuation, though the two sides subsequently formed a joint venture in the Netherlands.

This time seems different. Following a Financial Times report that talks of an asset swap had restarted, Vodafone said on Friday it is discussing an acquisition of Liberty’s overlapping European assets.

Assuming that means Germany and eastern Europe, a deal looks manageable: Liberty’s EBITDA from those businesses will be about $2.5bn this year, according to Morgan Stanley analysts.

On a typical cable-industry multiple of 7.5 times, the value of the deal including debt would be just under $19bn, or just over 15bn euros. Vodafone could finance that by pushing its net debt to little more than three times EBITDA, according to Breakingviews calculations using Eikon full-year estimates.

A straightforward acquisition, rather than an asset swap, avoids the complication of agreeing mutual valuations for Vodafone’s UK mobile unit and Liberty’s Virgin Media cable group. It also removes the thorny issue of getting approval from both European and British regulators, given the UK’s impending exit.

The simpler option also removes some of the upside, however. Jefferies analysts reckon the net present value of cost savings and revenue synergies from a full merger would be almost 20bn euros, with more than half coming from Britain. Missing out on those goodies is a shame — but surely a price worth paying for a greater chance of success.—Reuters

Published in Dawn, The Business and Finance Weekly, February 5th, 2018