Vodafone in talks with Liberty Global on asset swap, not merger

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Vodafone, the world’s second biggest mobile company, said it is in early talks about exchanging selected assets with Europe’s largest cable operator Liberty Global, which could enable each to better compete with rivals.

Analysts and sector bankers said the two most important countries for both firms where they overlap were Britain and Germany. They also both operate in Ireland, the Netherlands, Czech Republic, Hungary and Romania.

Vodafone, traditionally a mobile-only company, has been on the back foot in recent years as companies with access to mobile and fixed-line infrastructure such as Orange, Telefonica and Deutsche Telekom offer packages of services to customers in one bundle.

After weeks of speculation, Vodafone released a statement on Friday saying it was not in merger talks with Liberty, but was holding talks about a possible exchange of assets, without saying which businesses were being discussed.

“Whilst talks might yet lead to a full combination with Liberty, an asset swap would allow both parties to boost their respective positions in converging markets, and could still lead to a full combination over time,” analysts at Deutsche Bank said.

In Germany, Deutsche Telekom has started selling mobile, Internet, TV and fixed-line telephony in one package and in Britain, BT will be able to do the same once it has completed the acquisition of the country’s largest mobile operator EE.

Liberty Global, which has operations in 12 European countries, has a market capitalisation of $46 billion, while Vodafone’s is 66 billion pounds ($102 billion).

An industry banker said he believed Vodafone’s primary interest was in acquiring Liberty’s UK arm Virgin Media, while the main attraction for Liberty was Vodafone’s German business.

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Liberty already owns Unitymedia, Germany’s second-biggest cable operator, and it has long coveted its bigger rival Kabel Deutschland, which Vodafone bought in 2013 for $10 billion to merge with its mobile operations there.

“This deal is about swapping UK with Germany. Nothing else is relevant,” the banker said.

Alternatively, analysts said Vodafone could sell its British and Dutch operations in exchange for Liberty’s German business, however that would leave Vodafone out of its home market.

The lack of an obvious solution might shed light on why the two firms have failed to agree on a wider deal despite much speculation.

The stock is trading up 7 percent since May 19 when John Malone, the U.S. ‘King of Cable’ and chairman of Liberty, said in an interview that the two companies would make a “great fit”.

Other ways of teaming up include commercial deals, where both firms agree to sell the other’s services but these tend to be difficult to agree in terms of pricing and discounts. It would also not provide the billions of pounds of synergies that could come from a merger or acquisition.

The firms could also put their four overlapping markets – Britain, Germany, Ireland and the Netherlands – into a joint venture, however this also has its problems as few mobile joint ventures succeed and tend to end with one partner buying the other out.

Shares in Vodafone finished the day down 2.4 percent.

“There is no certainty that any transaction will be agreed, nor is there certainty with respect to which assets will ultimately be involved,” the company said in its statement.

Accendo Markets analyst Augustin Eden said that a merger could still be on the cards some time in the future.

“One has to wonder whether this is somewhat of a warm-up act for a heightened display of affection between the UK mobile operator and Europe’s biggest cable company,” he said in a note.