What would a Liberty-Vodafone look like?

Liberty Global CEO John Malone recently fanned the flames of speculation that his European-focused group would potentially be interested in a merger with Vodafone, describing a tie-up between the cable giant and the mobile operator as a "great fit".

Rumours of a potential merger are nothing new, but the tone has subtly changed. Now, Liberty and not just Vodafone has indicated that a deal would not be a completely unappetising prospect. The two companies appear to be increasingly of the view that a stronger asset base is essential in a converging world.

Such a move would be a huge undertaking and a game changer on the European telecoms market. In one fell swoop, Vodafone would gain access to cable assets in 12 European markets, with an overlap in seven markets: both operators have their own networks in Ireland, the UK, Germany, the Netherlands, the Czech Republic, Hungary and Romania. Liberty Global would in turn be able to expand its mobile operations after previously relying on virtual network operators to boost its multi-service strategy.

However, Vodafone is also present in other European markets as well as more far-flung destinations such as Turkey, India, South Africa, Australia and New Zealand. Liberty Global, on the other hand, has a high concentration in Europe, with just two markets--Chile and Puerto Rico--elsewhere.

There are certainly many potential areas of synergy, but for such a deal to go ahead it seems likely that Vodafone would be the company that would have to undergo significant change. According to UK press reports this week, major Vodafone shareholders have already made it clear that they like the idea of a Liberty Global tie-up, and have urged the company to consider a sale of networks in its more remote markets to facilitate a deal.

Other hurdles include the alignment of what are currently very different philosophies on how to run a major multinational corporation.

In financial terms, Vodafone is vastly bigger than Liberty Global with annual group revenue of £42.2 billion (€59.6 billion/$65 billion) in the year to end-March 2015, compared with $18.2 billion (€16.6 billion) at the U.S.-listed cable company in 2014. Vodafone's European operations alone accounted for £28 billion of group revenue last year.

As things stand, talks on a possible merger do not appear to be taking place, but the next few weeks could bring some interesting developments.

"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," concluded analysts from Jefferies International.--Anne

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