Vodafone's Dutch deal with John Malone's Liberty Global has breathed life into the tired "will they, won't they" saga of whether the two companies can consummate a bigger European tie-up. While there's merit in a broader alliance between the mobile operator and the cable-TV titan, don't expect a tidy resolution any time soon.
The Netherlands deal, a 50-50 joint venture including a 1 billion-euro ($1.1-billion) payment from Vodafone to Liberty, is a modest yet smart way of getting around the companies' weaknesses in a particular country. Adding Vodafone's wireless operations to Malone's fixed-line network means they can offer the full package of mobile, broadband and TV services that consumers are starting to favor.
Unfortunately, anyone hoping it might herald a rush to solve similar short-comings in the U.K. (see chart below) or Germany will probably be disappointed. If Vodafone's and Liberty's bankers had been able to overcome obstacles in those markets, we'd be talking about a far more impressive deal this week.
Vodafone CEO Vittorio Colao did say Tuesday that Vodafone would reassess and "look at opportunities" if conditions change. But while a joint venture did the trick in the Netherlands, Colao was at pains to point out this was no "blueprint" for other countries. The Dutch deal includes the combined company assuming 7.3 billion euros of Liberty debt, pushing its net debt to about 4.5 times earnings. That might be okay for a one-off deal on a "de-consolidated" asset, but the conservative Vodafone is unlikely to be comfortable doing similar in the U.K.
There's also the differences on valuing the companies' British and German assets. The Dutch deal valued Liberty's operations at 11 times 2015 earnings and Vodafone's at close to eight times, but agreement has been harder to find elsewhere. RBC analysts put Liberty's enterprise value in the U.K., where it owns Virgin Media, at $32 billion, or 10 times 2016 estimated ebitda. Vodafone is valued at 7.8 billion pounds on the same basis, slightly more than six times earnings. The gap in Germany is similar.
And in fairness to Colao and Malone, it's tough to read the future of the British mobile market, which is in a state of flux as BT acquires mobile operator EE and Hutchison's Three attempts to buy O2. Vodafone is confident that it's turned a corner in its poorly-performing European operations after a period of heavy investment and fierce price wars.
But while a Three-02 merger would remove one competitor from the British market, it could also let in new rivals if antitrust authorities demand the sale of spectrum by way of remedy. Billionaire price-slasher Xavier Niel is interested in the U.K. mobile market.
So even though Vodafone might want to hold off on a bigger deal for now, as its shares perform better than Liberty's, the situation could change quickly. Its strategic need for fixed-line assets, notably in the U.K., hasn't gone away. The Dutch joint venture might not be the answer, but at least it'll give both sides a chance to get to know each other even better.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Leila Abboud in Paris at firstname.lastname@example.org
To contact the editor responsible for this story:
James Boxell at email@example.com