Vodafone: merger talks wake up the watchdog

Mobile giant Vodafone has opened talks with John Malone's US-based Liberty Global media and communications organisation to explore the potential for working together. This is bold step by the £63 billion UK business, but any chance of striking a mutually acceptable agreement will face intense scrutiny by regulators.

"Liberty Global, which acquired Virgin Media in 2013, generates the majority of its revenues from Western Europe ($15.7 billion out of a group total of $18.2 billion), and there would be a clear fit between the groups' UK, German (Vodafone acquired Kabel Deutschland in June 2013) and Netherlands operations," explains Mike Rogers, an analyst at IT and communications boutique, Megabuyte.

Vodafone has come under pressure by rivals in an increasingly converging communications space. Changing consumer demands means that telecoms companies must offer a complete tool kit to customers. That means calls, texts, email, superfast internet, and content.

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Satellite broadcaster Sky has paid close to £4.2 billion to retain the lion's share of Premier League football for the three years from 2016, and has expanded its own mobile service through a deal with O2. BT has also made great strides over the past couple of years, and looks likely to seal the £12.5 billion purchase of mobile network EE in Britain.

Vodafone has a limited broadband network via its £1 billion Cable & Wireless acquisition in 2012, and has recently begun a modest roll-out to homes; and it has limited content options. The mobile giant's tentative talks with Liberty Global would address both of these issues at a stroke, although the UK company has denied that any negotiations will result in an all-out bid for its US peer, an apparent hat tip to the tricky regulatory hurdles any deal must overcome.

Analysts at stockbroker Jefferies remain sceptical for several reasons. First, breaking up Vodafone's European footprint would run counter to the European Commission's stated industrial policy objective of creating European 'champions' with the scale to compete against global telecom/internet peers.

"We believe Vodafone is regarded as a pivotal asset by EU politicians," says Jefferies' Jerry Dellis.

Another obstacle is potential value destruction of a merger, or asset swap. "Losing its pan-European footprint could be a big blow to Vodafone, assuming its had to hand over operations in, say, the Netherlands, Romania and Hungary," says Dellis. Purchasing power could also be eroded, the analyst adds.