Liberty’s operations are valued at €14bn, but with €7.3bn of debt they have an enterprise value of €6.7bn. Vodafone’s business is valued at €4.7bn on a debt and cash free basis, so the UK group will make a cash payment to Liberty Global of €1bn to equalise ownership in the JV.

The transaction is expected to close around the end of this year. It’s subject to regulatory approval, which shouldn’t be a problem.

The JV expects to incur €350m of integration costs in its first three years, but to generate annual synergies of €280m by year five and is looking to carry net debt of 4.5 to 5 times earnings, around twice as high as Vodafone has been familiar with. But both sides are apparently comfortable with the position.

Vodafone chief executive Vittorio Colao said: “Together we will be a stronger competitor in the Netherlands, benefiting customers of both companies and the market as a whole. This transaction marks a continuation of Vodafone’s market-by-market convergence strategy.”

Following on from its acquisition of cable operators in Germany and Spain, today’s deal marks further progress for Vodafone in the battle among Europe’s leading telecoms groups to offer combined packages to consumers, businesses and the public sector.

Muted response

However, the market gave a muted response to the deal at opening this morning. In fact, Vodafone’s shares have now ticked down a penny, as I write.

There’s a lot of hope of exceptional future earnings growth baked into Vodafone’s current 208p share price, with forecasts for the year ending March 2016 giving a sky-high price-to-earnings (P/E) ratio of 43. Analyst expectations of 18% earnings growth for the year to March 2017 still leave Vodafone on a super-elevated P/E of 36, while a price-to-earnings growth (PEG) ratio of two doesn’t scream growth at a reasonable price.

Vodafone’s high dividend yield of 5.4% may be part of the reason the share price is as high as it is, but I think another major factor is the market’s hope of a much bigger deal than today’s Netherlands news coming along at some point.

Bigger news ahead?

Last year, rumours of a fully-fledged merger between Vodafone and Liberty proved wide of the mark, but the two companies did embark on discussions about an extensive asset swap across Europe. However, those talks broke down in September.

Could the Netherlands joint venture be a precursor to a far bigger deal between Vodafone and Liberty? Both companies, as well as most analysts, see a marketplace logic and operational benefits of combining or swapping assets in key European countries.

Differences in valuation have apparently been the stumbling block, but comments on today’s deal by Liberty chief executive Mike Fries don’t rule out the possibility of bigger future transactions. He said he was looking forward to working with Vodafone, gaining “valuable knowledge and experience” and seeing “how this particular combination works”.

So, today’s news is encouraging for Vodafone shareholders, although I continue to think the P/E and PEG valuations are on the rich side and that Vodafone will have to beat analyst expectations to justify them.

The post Should You Buy Vodafone Group plc As It Hitches Up With Liberty Global? appeared first on The Twelfth Magpie.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Bearish or bullish? 

On 5 June 2015, Vodafone said that it was “in the early stages of discussions with Liberty Global regarding a possible exchange of selected assets between the two companies.“

Today’s statement gives Vodafone a different dimension — investors will now have to focus on fundamentals and nothing else. Frankly, I would not be prepared to buy its stock just yet, but I am ready to give management the benefit of the doubt, adding VOD to my wish list. 

That’s not been the case for a very long time. 

Evidence

I need more evidence, though, that growth in organic service revenue will get closer to 1.5% quarterly, and that projected trends derived from its latest quarterly results (+0.8% growth rate) will get better into 2017. In fact, at 2.3 times its forward net leverage is still problematic, in my view.

Furthermore, management must confirm that free cash flow will be about £1bn on an annual basis, and possibly as high as £1.5bn on the back of additional cost reductions. Based on these assumptions, Vodafone will likely be able to maintain its rich dividend policy, according to my calculations — its current stock price implies a forward yield of 5.3%.

That’s important because Vodafone has a significant debt pile and if it does not grow, both principal and interest repayments will become heavier and could certainly jeopardise its credit rating, which is just a notch above junk. Finally, it’d be great to hear more good news than bad news for its German business, which underperformed in recent times. 

210p

After months of speculations, its stock finally starts to trade without any M&A premium, which tends to inflate asset prices under extraordinary circumstances, including the possibility of a takeover, disposals or asset swaps. And that’s another reason why if I were to invest in the telecommunication sector today I would be tempted to buy VOD. 

Its shares are down almost 4% at the time of writing as the market did not digest the Liberty news, yet we are getting closer to a valuation that makes some sense now — the low end of my personal price target range remains 200p. By comparison, the average price target from brokers is about 250p, according to Thomson Reuters, but I’d expect a few downgrades as early as this week, particularly from the bulls who have pencilled a price target of 300p a share.

So, you can wait a day or two before deciding what to do.

The post Should You Buy Vodafone Group plc As It Ends Talks With Liberty Global? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Which will reach £2 first, Lloyds or Vodafone shares?
• 3 value stocks under £3 to consider in June

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, the UK firm ruled out a merger or takeover, saying that it was “not in discussions” about “a combination of the two companies”.

Is a deal likely?

Rumours have been circulating for weeks about a possible deal between Vodafone and Liberty Global. Vodafone shares rose sharply in late May, after Liberty chairman John Malone said the two firms’ western European assets would be a “great fit”.

However, this morning’s statement made it clear that there is no certainty a deal would be reached, nor which assets might be included.

What could a deal involve?

Vodafone’s assets are split between western European markets and emerging markets. The firm’s operations in the UK and Germany accounted for 35% of revenue last year.

Like Vodafone, Liberty has a strong presence in the UK (Virgin Media) and Germany. These two countries, plus the Netherlands, were singled out by Mr Malone as being a “great fit” in a Bloomberg interview in May. Collectively, they account for nearly 75% of Liberty’s revenue.

It’s possible that Vodafone and Liberty might agree to swap or combine assets in these countries. This would enable each company to offer quad play services (mobile, landline, broadband and television) to customers.

A swap such as this could mean that each company ends up with a complete set of cable and mobile networks in a smaller number of countries. Alternatively, a joint venture might be possible.

Emerging market spin-off?

Vodafone’s emerging market networks are unlikely to be part of any asset swap deal.

However, it is possible that Vodafone might spin-off its operations in Africa, India and Turkey into a new business. According to the FT, “a small but significant minority” of Vodafone’s shareholders would favour this approach.

As a Vodafone shareholder, I’m unsure about this. Part of the long-term appeal of the company, in my view, is its strong presence in emerging markets. I see markets such as Africa and India as offering greater growth potential than the mature and saturated markets of Western Europe.

The end result?

From the limited information available to us, all we know at present is that Liberty boss John Malone is keen on Vodafone’s assets in the UK, Germany and the Netherlands.

I’d imagine Vodafone boss Vittorio Colao feels similarly about Liberty’s assets in those countries.

One particular target for Mr Colao could be Liberty’s Virgin Media business in the UK. Taking control of Virgin Media would mean that Vodafone could offer a quad play service in the UK to compete with BT Group, which is in the process of acquiring mobile operator EE.

Some kind of deal looks increasingly likely, as long as these two very different companies can find a way of working together.

In the meantime, I plan to hold onto my Vodafone shares and focus on new buying opportunities elsewhere.

The post What Could A Vodafone Group plc & Liberty Global Deal Mean For Shareholders? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Which will reach £2 first, Lloyds or Vodafone shares?
• 3 value stocks under £3 to consider in June

Roland Head owns shares in Vodafone. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Takeover speculation has surrounded the two groups for some time. However, until last week there had been no comment from the companies themselves. But that all changed when Mr Malone said that Vodafone would be a “great fit” with his cable empire in Western Europe.

What’s more, Mr Malone seems to have put some serious thought into the matter stating that: 

“We’ve looked at that from our side and there would be very substantial synergies if we could find a way to work together or combine the companies with respect to Western Europe,”

Not a done deal

Even though Liberty Global seems to have put some serious thought into a potential tie-up with Vodafone, a deal is unlikely to go ahead anyntime soon. There are just too many barriers in the way of a potential deal. 

And the biggest obstacle will be the sheer size of the enlarged group. A merged Liberty-Vodafone would create a global behemoth with an enterprise value of more than $140bn. 

The new group would dominate Europe’s pay-television, broadband and mobile phone markets, a move that is bound to attract the attention of regulators. 

Break up ahead

Most analysts agree that Vodafone and Liberty are unlikely to merge in their present forms. Aside from regulatory issues, Vodafone has too much debt to acquire Liberty outright, and Liberty is unlikely to pounce on Vodafone for the same reason. 

Nevertheless, Vodafone could unlock value from its emerging market assets through a sale or spin-off, freeing up cash for the acquisition of Liberty. 

It’s estimated that the resulting merger of European operations after Vodafone divests its emerging market assets, could produce about $20bn in synergies. 

Different strategies 

Aside from the financial constraints blocking a deal between Liberty and Vodafone, Mr Malone believes that there is an enormous operational strategy void separating Vodafone and Liberty, which could prevent any deal. 

In particular, Liberty is an aggressive acquirer. The company has made €36bn of cable acquisitions across Europe since 2010. Over the same period, revenues have doubled, and shareholder equity has quadrupled.

Liberty doesn’t pay a dividend and reinvests all profit back into the business. 

On the other hand, Vodafone returns most of its profit to shareholders through dividends. Over the past five years, the company’s sales have declined by around 15% and shareholder equity has shrunk by 20%. 

Liberty’s approach has produced the best returns for investors. Indeed, over the past ten years the company’s shares have produced a total return of 18% per annum. 

In comparison, Vodafone’s shares have returned 7% per annum for the past ten years. 

The post Vodafone Group plc Pushes Higher On Bid Chatter But Will Liberty Global Really Make An Offer? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Which will reach £2 first, Lloyds or Vodafone shares?
• 3 value stocks under £3 to consider in June

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

And yesterday, in addition to its results, Booker Group announced the proposed acquisition of Musgrave Retail Partners — owner of Londis and Budgens — for a consideration of £40 million.

Whilst these deals are not material in the grand scheme of things, I must admit that my ears pricked up on Wednesday following some less-than-subtle hints from John Malone, chairman of Liberty Global (NASDAQ: LBTYA), regarding a potential merger with Vodafone (LSE: VOD), which sent the shares in an upward trend following some less-than-spectacular results, released on Tuesday.

Does it Make Sense?

The comments came just a day after Vodafone released its full-year earnings – I suspect, deliberately.  The company noted that it continued to struggle with falling prices coupled with the need to invest in their networks and other technologies for the future.  That said, the full year dividend was raised by 2% (better than inflation), taking it to 11.22 pence. Additionally, management stated that they are also planning to increase the payment annually as a sign of their confidence in future cash flow generation. Forecasters are pencilling in a further 2% increase, which beats inflation at the moment.

Malone said that that a long-rumoured combination between Liberty and Vodafone would be a “great fit”, and the market seems to be taking the possibility of a deal seriously, too, with speculation abound in the sector after deals such as BT Group’s proposed takeover of EE and Sky’s agreement with Telefonica.

In an interview with Bloomberg, the Liberty Global chairman pointed to potential benefits of a combination in markets such as the UK, Germany and the Netherlands, saying: “We’ve looked at that from our side and there would be very substantial synergies if we could find a way to work together or combine the companies with respect to Western Europe.”

So, there would be the possibilities of synergies and the emergence of a powerful competitor against the other big players in Europe…

Eat or Be Eaten

With the rise across Europe of quad-play services — mobile, broadband, fixed line and TV — Vodafone, the world’s second largest mobile operator, has been left wanting and now needs to play catch-up, even more so after Sky and BT’s deals in the last year.

Personally, I think that the firm could do worse than a merger with a global giant.  Should management walk away from any deal, they may well be left looking around for less powerful strategic partners or be forced into overpaying for an outfit simply to bring them level with their competitors.

What’s My Take?

As we can see from the chart below, the company has usefully outperformed the FTSE 100 over the past 12 months.

For my money, I wouldn’t be planning on buying a company based on a few words from the chairman of a rival company. Indeed, if a deal didn’t come to fruition, I suspect the share price would be headed in a southerly direction given the lack of growth on offer.

And whilst the shares currently offer an attractive yield of just under 5%, I think that there are currently better opportunities out there.

The post Are Vodafone Group Plc And Liberty Global plc About To Tie The Knot? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Which will reach £2 first, Lloyds or Vodafone shares?
• 3 value stocks under £3 to consider in June

Dave Sullivan owns shares in Booker Group and GVC Holdings. The Motley Fool UK has recommended share in GVC Holdings and Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.