Vodafone Abandons Talks With Liberty Global Over Asset Swap

Vodafone, Liberty Global End Asset-Swap Talks
  • Deal said to stall on valuation differences in U.K., Germany
  • Vodafone shares fall to 10-month low in London trading

Vodafone Group Plc ended talks about an exchange of assets with John Malone’s pay-TV giant Liberty Global Plc, denying the wireless company a chance to revive its European business that has been threatened by price wars. Shares of the mobile carrier fell to a 10-month low in London.

The deal stalled on differences over the valuations for Liberty Global’s Virgin Media unit in the U.K. and businesses including the companies’ German operations, according to a person familiar with the matter. Vodafone is also concerned about Liberty Global’s growing wireless presence, the person said, asking not to be identified discussing private deliberations.

Vodafone, the world’s second-largest mobile-phone company, announced the termination of the talks Monday, months after disclosing the discussions and almost a year after Bloomberg reported that the companies were exploring a combination. People familiar with the matter said earlier this year the companies were discussing a range of potential transactions including an asset swap, combining their western European businesses, or an outright merger. Liberty Global and Vodafone together have more than $80 billion in annual revenue and almost $130 billion in combined market capitalization.

A Liberty Global spokesman confirmed that the asset-swap talks had ended. In an interview this month, Malone said the companies weren’t able to overcome a deadlock he described as a "tennis match" of ideas.

"Conceptually there could be some real value created but realistically we haven’t been able to figure out a way to do that that’s mutually successful," the 74-year-old said at the time.

Vodafone shares fell as much as 4.6 percent and traded 3.6 percent lower at 209.75 pence as of 2:37 p.m. in London. Liberty Global lost 4.1 percent to $46 in New York.

Vodafone is giving up an opportunity to gain pay-TV and broadband businesses in markets such as the U.K. and Germany as it seeks to reduce its reliance on a wireless business that has suffered from a fierce price war in Europe. For Liberty Global, a deal with Vodafone would have deepened a shift in strategy at a media company that until recently has shied away from owning wireless networks.

Future Deal?

While Liberty Global isn’t closing the door on a future deal, the companies aren’t discussing a full merger, two people said. Since the companies didn’t mention any intention to make an offer, they aren’t bound by U.K. takeover rules on when they could potentially revive discussions.

Representatives for Newbury, England-based Vodafone and London-based Liberty Global declined to comment beyond their statements.

For now, the companies are forgoing what Malone once described as “enormous potential synergies.” Comparing Vodafone to “a big banana in the jar,” Malone said in an interview in May: “The question is: how do you get your hand out of the jar with the banana.”

Without a deal, Vodafone Chief Executive Officer Vittorio Colao may choose to add TV and Internet services to his mobile networks in Europe. In the U.K., mergers among its rivals have left the company with few options outside of a deal with Virgin Media to gain market share. The combination of O2 and Three, local units of Telefonica SA and CK Hutchison Holdings Ltd., will create the country’s biggest mobile operator while BT Group Plc’s acquisition of EE will make it the largest "quadruple-play" service provider.

Regulatory Scrutiny

“It’s good news that Vodafone is not sucked into a swap of assets -- I was never convinced that there was real value for shareholders in that scenario,” said Paul Marsch, an analyst at Berenberg Bank in London. “We can never rule out a future deal, but for real value to be created it has to be a full-blown merger on a nil-premium basis where both sets of shareholders get upside from the significant synergies."

A deal between the companies would have reshaped Europe’s telecommunications and cable industries and also attracted antitrust scrutiny. The executive who leads Deutsche Telekom AG’s German unit said this month the company would oppose a merger of Liberty Global and Vodafone in its home country. Besides Germany, Malone has said the U.K. and the Netherlands are key European markets for expansion.

Earlier this month, Nordic carriers TeliaSonera AB and Telenor ASA scrapped the merger of their Danish businesses amid European Union opposition, signaling Competition Commissioner Margrethe Vestager is taking a tough stance on phone carrier combinations. The Danish merger was the first deal to land on Vestager’s desk since her predecessor was criticized for approving similar transactions.

"A tougher regulatory stance toward deals in Europe probably reduced the transaction’s appeal while Liberty’s complex tax structure may also have contributed to the failure of talks," Bloomberg Intelligence analyst Erhan Gurses said it a note.

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