Vodafone and Liberty Global Call Off Asset Swap Discussions

The two companies have large overlapping businesses in the United Kingdom, Germany and the Netherlands, but the regulators could take issue

Allan C. Nichols, CFA 28 September, 2015 | 1:06PM
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Vodafone (VOD) has today announced that it had ended discussions with Liberty Global. We never thought a full merger made much sense, and thus we are making no changes to our fair value estimates or moat ratings for the firms. The two companies have large overlapping businesses in the United Kingdom, Germany and the Netherlands, where significant cost savings and network improvements could be created by a merger.

However, we have always been sceptical that the German regulators would approve a merger that includes both Kabel Deutschland, the largest cable TV operator in Germany, owned by Vodafone, and Unitymedia, the second-largest cable TV operator in Germany, owned by Liberty Global. Liberty Global previously tried to acquire Kabel Deutschland and Tele Columbus, the third-largest cable TV operator, only to have the deals rejected by the regulators.

While the regulators could change their minds, given increased competition between telecom operators, particularly Deutsche Telekom, we do not believe that this point has yet been reached, and without Germany, this merger doesn't make sense. We also projected that the price John Malone would require would make it virtually impossible to earn a decent return on the investment.

Vodafone has a Narrow Economic Moat

Vodafone is one of the largest wireless phone companies in the world, with 443.6 million proportionate customers. It has networks across the world. Where it doesn't have its own operations, it has formed strategic partnerships.

The firm can develop a product in one country and roll it out to others at minimal additional expense. In addition, many countries are selling additional spectrum. Thanks to Vodafone's scale, it can afford to bid for more spectrum, which improves the quality of its network, thereby attracting more valuable heavy data users.

The recently completed purchases of Kabel Deutschland in Germany and Ono in Spain adds to Vodafone's network strength, particularly among retail customers. The firm has done a great job of using its scale advantages to enter new markets. Its scale advantages result in a narrow economic moat, in our opinion.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Vodafone Group PLC117.54 GBX-1.98Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.