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

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.