Liberty's Malone opens door to Vodafone tie-up

Liberty Global chairman John Malone appears to have opened the door to a possible merger with Vodafone, describing a tie-up between the European cable giant and the mobile operator as a "great fit".

"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," Malone said in an interview with Bloomberg.

However, the 74-year-old chairman also said there are some barriers to such a deal, citing "huge differences" in how the two empires are run.

Speculation that Vodafone and Liberty Global could merge is certainly nothing new. Although obstacles certainly exist, such a move would align with the strategy of both companies to offer quad-play plans combining fixed and mobile services.

The UK-based mobile operator has already bought cable assets in Europe including Spain's Ono and Kabel Deutschland, and said it will launch its consumer broadband proposition in the UK in the coming weeks, with TV to follow later in 2015. "As a result [we] will be offering integrated fixed and mobile services in all of our major European markets," Vodafone said.

Liberty Global meanwhile has typically established mobile virtual network operators (MVNOs) in order to add mobile to its cable broadband and TV offering. However, the company recently agreed to buy BASE Belgium from KPN, marking a departure from its previous stance that it is not interested in buying or building its own mobile networks.

Malone's comments immediately provoked further speculation on how such a merger of the two heavyweights could come about. Vodafone has so far refused to be drawn on the matter, although CEO Vittorio Colao indicated that the operator would consider "things that make sense, whether it's Liberty or Hellas Online or whatever," Bloomberg reported.

Analysts from Jefferies International said they have long argued that a merger with Liberty Global would make sense.

"If more lukewarm prior statements by Liberty Global had cast undue doubt over the merger scenario, we think these latest statements should remove it," the analysts said.

They added that Malone's comments reflect a change of tone at the cable operator. "Previously the line had been that mobile needs cable more than cable needs mobile, so the decision would be Vodafone's more than Liberty Global's."

What might have changed, the analysts said, is that "Liberty Global has stated clearly that the potential for volume-driven growth, while still remaining substantial over a mid-term horizon, will eventually peter out."

From Vodafone's perspective, evidence for the benefits from Project Spring is coming through, but less than Jefferies said it had hoped for by this stage.

"Even if a deal with Liberty Global might be difficult in the near term…it provides the most convincing basis for a stronger equity story in the medium term, in our view," the analysts said.

The comments from Malone came after Vodafone reported that its organic service revenue--which strips out one-off costs such as handsets--returned to growth for the first time in almost three years, rising 0.1 per cent in the fiscal fourth quarter to the end of March (calendar Q1). On a reported basis, quarterly revenue was up 7 per cent at £9.56 billion (€13 billion/$14.8 billion).

The improvement in organic service revenue was helped by 6 per cent growth from the Africa, Middle East and Asia Pacific division. In Europe, organic service revenue also fell by a lower rate of 2.4 per cent compared with the 2.7 per cent fall in the previous quarter. However, Germany remained a weak spot due to strong competition. The company said the CEO of Vodafone Germany, Jens Schulte-Bockum, would stand down during the 2015-16 financial year.

In the full fiscal year to end-March 2015, organic group service revenue was down by 1.6 per cent at £38.5 billion. Organic group revenue also fell slightly by 0.8 per cent to £42.2 billion.

EBITDA declined 6.7 per cent to £11.9 billion, but Reuters noted that the company finally forecast 2016 core earnings growth on an organic basis following seven straight years of declines. Vodafone forecast a range for 2015-16 core earnings of £11.5 billion to £12 billion, which would indicate core organic earnings growth of between 1 to 5 per cent, Reuters said.

For more:
- see this Bloomberg article
- see this Reuters article
- see Vodafone's results statement

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