Will they or won’t they?
The market continues to speculate whether or not Vodafone (LSE: VOD) and Liberty Global will announce a tie-up any time soon.
But there are many reasons why a deal is unlikely to go ahead. Firstly, the two companies have different operating structures.
Convincing shareholders
The main reason Liberty won’t make an offer for Vodafone is the different operating structure of the two companies.
As I’ve covered before, Vodafone and Liberty both run their business in different ways. Liberty has a high level of debt and doesn’t pay out a dividend. While Vodafone is one of the FTSE 100’s dividend champions and operates with a relatively low level of gearing.
And as Vodafone is a dividend champion, the company’s shares are held by many UK income funds. These funds would block any deal between Liberty and Vodafone as it will put Vodafone’s dividend payout in jeopardy.
Liberty is unlikely to want a long, drawn-out battle with shareholders for control of Vodafone.
So, it’s more than likely that the company will try and buy the assets it wants off Vodafone, rather than mounting a full takeover.
Cost
The sheer size of the deal is also likely to be a hurdle for both Vodafone and Liberty.
Vodafone’s equity is valued at $93bn, compared with $45bn for Liberty Global. Including debt, Liberty Global has an enterprise value of about $88bn and Vodafone an enterprise value of around $130bn.
Vodafone’s net debt-to-EBITDA ratio currently stands at 2.4x, compared to Liberty’s ratio of 5x.
To acquire Vodafone, Liberty would have to pay in excess of $130bn, while some of this could be funded through equity issuance and asset disposals, for the most part, a deal will have to be financed with debt.
Liberty already touts $44bn of debt on its balance sheet and pays $2.5bn per annum in interest costs, which is around 100% of earnings before interest and tax (EBIT).
Liberty really would struggle to find the cash to buy Vodafone.
Management infighting
Along with shareholder issues and debt troubles, the question of who will run the enlarged Liberty-Vodafone when the deal completes could also be a stumbling block.
You see, Liberty is controlled by billionaire founder and CEO John Malone. It’s unlikely that Mr. Malone would want to give up control in favour of a new board for the enlarged company.
Regulators
And the final factor that could hold back a deal between Vodafone and Liberty is the regulatory issues these two companies will face.
Vodafone and Liberty both operate within similar markets across Europe, and in some markets, like Germany, the two companies dominate the market.
Liberty owns Unitymedia, Germany’s second-biggest cable operator and Vodafone owns Kabel Deutschland, Unitymedia’s larger peer. The two companies operations also overlap in Britain, Ireland, the Netherlands Czech Republic, Hungary, and Romania.
So, if any deal were to go ahead, there would need to be a huge restructuring to push it past regulators.
