Vodafone and Liberty may finally agree European deal, analysts say

On Friday, confirming a newspaper article, Vodafone said it was in "early stage discussions" with John Malone's cable network owner regarding "the acquisition of certain overlapping continental assets owned by Liberty Global".

This ruled out a deal for Liberty's UK assets of Virgin Media, nor a combination of parent companies as had been rumoured over the years since talks were first reported in 2015, with the only product so far being the h the merger of Ziggo/Vodafone in The Netherlands in 2016.

The overlapping continental European assets would be Germany, Netherland, Hungary, Czech Republic and Romania, together with an enterprise value of around $31bn.

Credit Suisse said the size of this deal would allow Vodafone to pay a larger portion in cash, implying the accretion to free cash flow per share could be considerable higher than an acquisition of all of Liberty Global.

An acquisition of only overlapping assets would likely be accretive to free cash flow already in year one, CS said. "It further reduces investor concerns that Vodafone would do a bigger dilutive deal."

RBC Capital Markets said an all-cash transaction "is possible" with part payment in equity from the Ziggo joint venture, the cost to Vodafone would be €20.7bn minus €3.6bn Ziggo equity, so €17.1bn.

Vodafone's March 2019 leverage would increase from 1.8x to 2.7x but if Ziggo is not part of the payment, leverage would be 2.9x, with the possibility to sell if 42% stake in Indus Towers to accelerate deleveraging.

"In our analysis an acquisition of German and certain CEE assets would be feasible, require no or little equity and be neutral to FCF in year two, circa 6% accretive in year three, while accelerating Vodafone's growth in Germany/CEE," RBC said.

Buying Liberty out of Germany would double Vodafone's cable footprint to circa 60% of the country, said broker Numis. "Because of this, cable's long and enduring value, and the total worth of Germany's market, we doubt investors will begrudge VOD if it pays a full multiple," analysts said, looking at 11-12 times EBITDA.

Noting that "skittish stock markets create buying opportunities", Numis upgraded its rating on Vodafone to 'buy' after the shares fell after last week's third-quarter trading update, though its forecasts and 270p target prices remained unchanged.

Germany is the jewel in the Liberty crown, said Deutsche Bank, growing top line and operating cash flow, Liberty's measure of profitability, around 5% in 2017. DB said the German business's value of around €18bn, equivalent to 11.4 times 2018 estimated EBITDA was a meaningful premium to both Liberty's near-8x market multiple and certainly Vodafone’s nearer 6x.

RBC saw Germany at a value of $19-21bn and estimated the net present value of synergies between Vodafone and Liberty in Germany and these central and Eastern European assets would be around €6.5bn.