A Vodafone And Liberty Global Merger: $25 Billion In Synergies?

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According to a December 1st report from Nomura Global Markets Research, Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) is eying John Malone‘s Liberty Global plc (NASDAQ:LBTYA) in a deal that would reset the European telecom landscape. Analysts say that a deal between the two telecom giants is by no means a sure thing, and that Friday’s news that Vodafone was looking at Liberty Global could just be a test balloon from the company to see how shareholders and Wall Street react to the idea.

Key implications of a Vodafone – Liberty Global deal

Nomura analysts James Britton and colleagues argue a Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) – Liberty Global plc (NASDAQ:LBTYA) merger would offer significant industry synergies totaling to $25 billion. They note: “Precedent from Vodafone’s cable deals in Germany and Spain point to cost synergies valued at around  USD 17 billion. Revenue synergies might add a further USD 8 billion in value.”

In their report, Britton et al. highlight several key implications if the two telecom titans do end up merging:

  • The new Vodafone’s proforma revenue CAGR would increase by one-third from 1.5% to 2.0%.
  • The new Vodafone’s proforma EBITDA CAGR would grow from 3.5% to 3.7% (pre-synergies) and to 5.0% (post-synergies).
  • At a bid price of USD 65, Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) would need to issue GBP 28.7 billion in equity and raise GBP 6.4 billion to maintain combined leverage at 3.5x net debt/consolidated EBITDA.
  • The new Vodafone would experience normalized FCF per share dilution of around 9% in the first year post-merger, but a solid accretion of 5% after the full extraction of synergies.
  • Based on these assumptions, the new Vodafone would trade on around 9.0 times 2015 EV/EBITDA.

 Other implications

Vodafone - Liberty Global 1

  • If the merger happens, Vodafone Group Plc (NASDAQ:VOD) (LON:VOD)’s dividend payout ratio would rise above 90% of normalized cashflow. Britton and colleagues highlight that the deal could cause a downward revision of Vodafone’s dividend closer to peers, especially if management wants to deleverage to secure top credit status.
  • Any remaining strategic premium for Vodafone based on a return of AT&T Inc. (NYSE:T) to Europe following the acquisition of DIRECTV (NASDAQ:DTV) would soon disappear.
  • Vodafone cements its position as one of two dominant operators in three major EU markets – Germany, the UK and the Netherlands. The Nomura analysts note that smaller operators, especially in the UK and the Netherlands, will likely feel pressured to merge to compete, enhancing telecom market structure.
  • Finally, European competitors are likely to revisit whether they need greater scale to compete with an enlarged Vodafone Group Plc (NASDAQ:VOD) (LON:VOD). This could revive the political debate over cross-border deals. Britton et al also point out that a large consolidation event on this scale would be generally supportive for sector valuations.

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