Deals

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Cable billionaire John Malone faces a reckoning on mobile strategy in Britain, his most important overseas market.

Malone's Liberty Global, Europe's biggest cable company, had hoped to pick up U.K. wireless capacity on better terms as part of Li Ka-Shing's purchase of Telefonica's O2. With that deal looking doomed by regulators, he needs a rethink.

A simple choice for Liberty would be to just buy O2 itself. The possible 8 billion pound ($11.5 billion) price tag is in the reach of a man with few qualms about levering up. But the calculation Malone must make is whether he'd be better off waiting for that elusive tie-up with Vodafone in the U.K. It would certainly be cheaper.

Common Footprint
Liberty's biggest generators of cash flow are Britain and Germany, where Vodafone is also present
Source: Mirabaud Securities

Liberty is (understandably) wary about making big investments in the lower margin, shrinking mobile business. But after a couple of years playing cat-and-mouse with Vodafone boss Vittorio Colao, it will need a bigger U.K. bet at some point. BT's purchase of EE has left it as the supreme power in British fixed-line and mobile, able to offer a full suite of services to customers, and Liberty's U.K. offshoot Virgin Media has to respond.

To date, Virgin has relied on renting mobile capacity on EE's network. While the Liberty unit is a force in cable -- with growing sales and profit -- it's been stuck at about 3 million mobile subscribers for years, with limited success in convincing cable customers to buy mobile too.

Quadruple Play Dilemma
Virgin Media has made scant progress in signing up cable customers to mobile services
Source: Company filings

Liberty understands that Europe's telecoms landscape has changed, with the charge toward convergence symbolized by BT's game-changing deal. After years insisting that renting capacity was the way to go, Liberty paid 1.3 billion euros to buy a Belgian mobile network last year. In February it signed a Netherlands joint venture with Vodafone and starting talking up mobile as central to its future.

That Dutch tie-up is seen as a test of whether a bigger Liberty-Vodafone deal could be struck in the U.K or elsewhere. But there's danger in waiting around too much longer, with the British telecoms landscape being reshaped.

On paper, 02 seems a simpler option, if more expensive. Liberty wouldn't have to depend on reluctant partners at Vodafone. 02 is a good asset: it has 25 million subscribers and the best spectrum in the country after BT. Telefonica will probably have to accept less than the 10.25 billion pound on offer from Hutchison since it needs to cut debt.

Given its record, Liberty could finance a deal despite its high leverage. Peer Altice did a huge debt refinancing in April, showing how high-yield markets have recovered since February. Liberty's net debt is about 5.5 times Ebitda. That's above its own target, but is expected to decline to about 5 times next year and 4.8 times in 2018, according to Mirabaud Securities.

Yet an O2 purchase would probably close the door on any bigger deal with Vodafone, a prize Malone memorably described as like trying to get a banana out of a jar. Vodafone also offers the promise of a Europe-wide deal or one that includes Germany.

There's also the price. Vodafone's U.K. unit is worth less than Virgin Media, so if the two were to stick to a 50-50 accord on the Netherlands model then Colao would need to cut Malone a check -- the size of which would depend on how much debt the two put on the new entity. RBC analysts put Liberty's U.K. enterprise value at $32 billion, 10 times 2016 estimated Ebitda. Vodafone's valued at 7.8 billion pounds, slightly more than six times earnings.

Of course, it's those valuation differences that have stymied a Vodafone deal so far. They'd make a joint venture difficult to structure.

And it would be over-stating things to say Malone's need is desperate. Virgin's in good health. It’s in the midst of a 3 billion pound expansion of its cable network that will pit it against BT in more of the country. That said, waiting around for a dominant BT to really hit its stride is a gamble. Malone has taken a leisurely approach on U.K mobile. He won't have that luxury much longer.

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 labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net