Valuation likely to be sticking point in Vodafone-Liberty deal, says Bank of America

Vodafone's share price is likely to be buoyed by speculation regarding a potential merger with Liberty Global over the coming days, though analysts at Bank of America Merrill Lynch remained cautious.

The US bank reiterated an 'underperform' rating on the stock, saying that concerns about each company's valuation are likely to be a "major stalling point" for any potential deal.

A day after underwhelming with its annual results, Vodafone's stock was rebounding on Wednesday following comments by Liberty's chairman John Malone that the UK telecom would be a "great fit".

He said in an interview with Bloomberg that a Vodafone tie-up would create "substantial synergies […] if we could find a way to work together or combine the companies with respect to Western Europe".

Merrill Lynch analysts had previously flagged the "strategic logic" of a deal between the two groups, identifying $20bn of potential synergies.

However, with Vodafone trading at 6.9 times operating profits and Liberty at over 9.0 times, "valuation looks set to be a major stalling point", the broker said.

"A merger of equals is unlikely to satisfy either party with a synergy split equivalent to around 10% upside per share VOD upside, or 20% per Liberty share," Merrill said.

"Nevertheless, Mr Malone’s ‘approach’ is likely to boost VOD in coming days."

Aside from the Liberty speculation, Merrill said Vodafone remains a "work in progress" with its recent results "overshadowed by underperformance in its biggest market, Germany".

The broker said: "Our concern remains that mid-term capex guidance is too low and that dividend cover is at risk from an already high payout."

The stock was up 3.2% at 233.9p by 09:21.