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Malone’s next step?

John Malone controlled Liberty Global is in the news on a daily basis given Malone’s recent aspiration comments on telco giant Vodafone. Those comments have helped propel both Liberty and Vodafone’s share price to high levels (up 11 per cent this week). But will the deal happen, and if it does who will be ‘in charge’?  Normally any deal that involves Malone usually leaves his company firmly in charge. That might not be the ideal case this time around, says Jerry Dellis, an analyst at investment bank Jefferies in a note to clients on May 29th.

Jefferies looks at two scenarios: Vodafone in charge, or Liberty in charge.  The bank stresses that at this stage no offers have been tabled, and no talks taking place “at present”. “Dr Malone appears to have expressed a personal view in his recent intervention, and this has had the effect of returning the topic to the top of investor agendas for Vodafone’s post-results roadshow. Vodafone says it is waiting to see if Dr Malone’s comments will be backed up with an offer from LBTY, something we think it would consider pragmatically. However, Vodafone notes that AT&T’s public expression of interest never actually crystallised into a firm offer. For now, we are therefore debating the merits of deal scenarios in a situation where all public statements are extremely vague,” adds Dellis.

Nevertheless, the bank thinks the likelihood of a VOD+LBTY combination “is high”.  The bank identifies three principal reasons:

1.     There is some urgency on Vodafone’s side. We do not believe that the group will attract/sustain a premium rating in its current form.
2.     Synergies could be substantially higher than we initially estimated last year (see mentioned note from 5 Dec).
3.     Malone has now stated an interest in principle.

The bank states: “The rationale for Vodafone wanting to be an acquirer would be: (1) to accelerate its convergence strategy building on the enhancements delivered through Project Spring, (2) access significant synergies, (3) facilitate a tighter balance sheet through more robust growth prospects / reduced exposure to sporadic mobile price wars, (4) secure material value accretion for shareholders by attracting a higher trading multiple, (5) improve dividend coverage.”

However, what if Malone wants control? The bank says: “John Malone’s comments from May 19th have been widely interpreted as suggesting an active interest in acquiring assets through Liberty Global. Clearly, his invocation of the image of a ‘banana in a jar’ played a role here. However, we note that the more specific comments were actually that (a) Liberty Global and certain assets in Vodafone Europe would be a ‘great fit’ due to significant synergy potential, and (b) that it would be fruitful to find a way to ‘work together’ or ‘combine’ the assets. In our view, it is entirely conceivable that the ‘banana’ in question is not Vodafone (or some of its assets) but rather ‘a deal structure’ as such. In other words, we believe that the comments do not necessarily imply a strong desire to acquire. The rationale to acquire would be: (1) to access significant synergies, and (2) strengthen the asset portfolio against fixed-mobile aggression from integrated operators.”

Jefferies pulls no punches in stating there are real hurdles ahead for any deal, not least anti-trust examinations from a number of interested regulators.

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