Vodafone shares set for deeper fall, but Liberty will call again
Ken Odeluga September 28, 2015 9:27 PM
<p>Vodafone and Liberty Global have called ‘it’ off. For many investors, ‘it’—the deal—was as much a source of concern as whether it would go through […]</p>
Vodafone and Liberty Global have called ‘it’ off.
For many investors, ‘it’—the deal—was as much a source of concern as whether it would go through or not.
This added to the uncertainty over the four months or so since a potential deal between the world’s No.2 mobile company and world’s biggest cable company was mooted.
The pair confirmed they were considering an ‘asset swap’ in June.
The eventual outcome of this would be a de facto partnership that could have enabled ‘cross selling’ of cable, fixed-line, mobile, broadband and other ‘quad-play’ services, and beyond.
In short, it could have been a quicker way for Vodafone to catch-up with the capabilities of ‘quad’ or ‘triple-play’ rivals, like TalkTalk, BT, Liberty-owned Virgin Media, Sky and others.
The increasing threat implied by these has probably been instrumental in keeping Vodafone stock under pressure in the year-to-date with a 9% drop (by last Friday) compared with the FTSE’s 6%, despite VOD’s 14% run-up between 19th May and early June.
In fact Vodafone stock setting fresh 2015 lows on Monday with a fall as deep as 4.5% is quite consistent with investors re-evaluating the equity story which had taken the shares 44% up from October 2014’s trough to June 2015’s peak.
Similarly, Liberty-Vodafone talks reportedly stumbling on the parties’ inability to agree the relative value of assets on both sides is something we spotted as a potential risk in the summer.
As noted then, a pro forma figure for the European VOD assets coveted by Liberty might have been based on c. 7.05 times 2017 Enterprise Value/Ebitda.
That implied a take-out figure for VOD’s German businesses alone of £7.7bn.
It was questionable whether Vodafone could discount its entire European operations for less.
On the other hand, the implied value may have made the eyes of even inveterate leveraged acquirer John Malone, Liberty’s chairman, water.
In the end though, I expect Vodafone investors to find some solace in the fact that valuation (AKA ‘price’ in an asset-swap deal) was the main area of concern.
The same logic that drove Vodafone and Liberty together in the first place still holds sway.
Synergies estimated between $30bn of combined net asset value will be one important factor.
Plus, Vodafone still needs to tackle the issue of European service diversification head-on, and there are still no other viable sellers in the region right now.
On LBTYA’s side, it wants material European expansion.
But high leverage (total debt/equity: 313.70%) is (finally) starting to make LBTYA’s preferred direct leveraged finance model inefficient—something rating agencies have been warning would happen for years.
In short, it makes sense, even so soon after the ‘break-up’, to expect some sort of a ‘make-up’; though timing is of course the most important unknown.
At the very least we would need to see a signs of a more measured approach to valuation on both companies’ parts first.
Additionally, Liberty would be remiss to engage in further separate debt-fuelled corporate action before the resumption of talks.
A depletion of Vodafone equity value might encourage management to take Liberty’s call when it comes.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.