Analysts Handicap Possible Liberty Global, Vodafone Asset Swaps

John Malone in 2012 - H 2015
Associated Press

Wall Street observers see U.K., German and Dutch operations in focus.

Analysts on Friday weighed in on news that John Malone's pan-European cable operator Liberty Global and U.K. telecom giant Vodafone Group have held early-stage discussions about possible asset swaps.

Vodafone emphasized in a statement that the two companies were not in talks about a merger.

"Vodafone confirms that it is in the early stages of discussions with Liberty Global regarding a possible exchange of selected assets between the two companies," the company said. It didn't provide specifics.

Wunderlich Securities analyst Matthew Harrigan told The Hollywood Reporter that the talks were likely the "first pass in a long process that may or may not lead to a deal." 

Malone had earlier this year said that he would be interested in Vodafone’s core European assets. Most analysts took that to mean that the companies' operations in the U.K., Germany and the Netherlands would likely be in focus. They said swaps would allow the companies to offer bundled pay TV and telecom services.

But analysts said Friday it wasn't clear if the two sides could agree on swaps that would benefit them equally. "I do not think Malone wants to exit any of U.K., Germany or Netherlands," said Harrigan.

But others suggested that Liberty could leave its Germany business to Vodafone in return for the latter's U.K. and Dutch units, even though at least one observer highlighted that Vodafone was headquartered in the U.K. and may therefore not want to exit that market. But such a swap would exchange assets of comparable enterprise values, according to RBC Capital Markets.

Macquarie Capital analysts Amy Yong and Guy Peddy emphasized in a report that they previously argued that "Liberty Global acquiring Vodafone was unrealistic and in our view the more rational transaction would be for Vodafone to complete a deal with Sky as content remains a more powerful driver of consumer spend in the home than access."

They added on Friday: "Neither Vodafone nor Liberty Global have any track record of integrating wireless and cable TV assets." And they cautioned: "Any deal with Liberty Global would in our view result in a transfer of value from Vodafone to Liberty Global." 

Discussing any deal rationale, they explained: "There is a belief among European operators that bundles and convergence are key to the long-term development of the industry. This is a proposition rationally championed by incumbents, which have both nationwide fixed and wireless infrastructure, and this provides them with a competitive advantage."

The U.K., Ireland, Germany and the Netherlands account for 40 percent of Vodafone’s revenue and earnings and almost three-quarters of the financials at Liberty Global.

Twitter: @georgszalai