Vodafone vibrating on Malone's messages about Liberty merger

Shares in Vodafone have rung up gains on Wednesday after US telecoms tycoon John Malone, the owner of Liberty Global, dropped heavy hints about a potential merger.

Malone, speaking a day after the FTSE 100 telecoms company's somewhat disappointing results, said that that a long-rumoured combination between Liberty and Vodafone would be a "great fit".

Deal speculation has been rife in the European telco sector after deals such as BT's proposed takeover of EE and Sky's agreement with Spain's Telefonica.

But some analysts suggested the comments were really a ruse to put pressure on Vodafone’s board to break-up the company rather than actually force a merger.

"We suspect his comments are designed to put pressure on Vodafone’s board to consider a break-up of the company," said Nomura

But 74-year-old Malone, in an interview with Bloomberg, pointed to potential benefits of a combination in markets such as the UK, Germany and the Netherlands

"We’ve looked at that from our side and there would be very substantial synergies if we could find a way to work together or combine the companies with respect to western Europe.”

He compared Vodafone to “a big banana in the jar” and, “talking philosophically", said: “The question is: how do you get your hand out of the jar with the banana.”

With the rise in Europe of quad-play services - mobile, broadband, fixed line telephone and TV - Vodafone, as the world’s second largest mobile operator, has been expected to play catch-up for some time, even more so after Sky and BT's deals in the last year.

But analysts at Nomura said they doubted whether Malone was ready to yield control at Liberty Global, "so we suspect his comments are designed to put pressure on Vodafone’s board to consider a break-up of the company to optimise shareholder value".

The Japanese bank cautioned that it sensed resistance from Vodafone management to consider a break-up and therefore "would not expect progress in the near term".

Read more: Valuation likely to be sticking point in Vodafone-Liberty deal, says BofAML

Having previously flagged the strategic logic of a deal due to $20bn of potential synergies, Bank of America Merrill Lynch, admitted valuation looked set to be a major stalling point with Vodafone around 6.9 times EBITDA and Liberty more than nine times.

"A merger of equals is unlikely to satisfy either party with a synergy split equivalent to circa 10% upside per share VOD upside, or 20% per Liberty share. Nevertheless Mr Malone’s ‘approach’ is likely to boost VOD in coming days."

Analysts at Accendo Markets said that a vicious price war may soon see Vodafone’s fast ageing business model causing it to lag the competition. "With Vodafone having missed the M&A boat on several occasions now, this one may be the last to sail."