Few would value the phrase "great fit" at £4bn. But after Liberty Global chairman John Malone used it to describe Vodafone (VOD), mounting speculation of a mega-merger between the US cable giant and the UK mobile operator sent the latter's shares up 12 per cent in three days.
Analysts at Jefferies think Mr Malone is deliberately "floating a test balloon" to gauge shareholders' interest and alert Vodafone's management that he's open to discussion. The veteran business magnate is certainly aware of the barriers to such a deal: he described Vodafone's assets as a "big banana in a jar" - the challenge is extracting it. He also warned that the companies could clash due to their starkly different cultures.
A merger would create a £95bn telecoms behemoth, a prospect that would leave any anti-trust regulator in a cold sweat. Accordingly, Mr Malone only expressed his interest in Vodafone's European assets, fuelling speculation that Vodafone might sell parts of its emerging-market operations to fund or secure a tie-up.
The structure of the deal remains anyone's guess, and analysts have welcomed the invitation. Goldman Sachs paints Vodafone as the likely seller, given its commitment to paying dividends and the potential tax benefits of an overseas acquisition for Liberty Global. Meanwhile, Jefferies believes Vodafone might offer $60 (£38.73) a share to Liberty Global's investors - although that would drive its net debt up to an estimated £51bn, or three times forecast cash profits. The broker predicts a tie-up could generate £5.5bn in synergies; Merrill Lynch pegs them at closer to $20bn. Citigroup, meanwhile, thinks a stock-based deal could boost earnings at both carriers and generate £1.4bn in annual free cash flow.
A deal might help to ensure Vodafone's long-term competitiveness. If the group links up with Liberty Global's UK broadband business, Virgin Media, it would gain access to around 4m broadband customers, and be able to offer them enticing packages of TV, mobile and high-speed broadband. It could also help Vodafone deal with the emerging threat of BT. The fixed-line telecoms titan, which is set to acquire UK mobile-market leader EE, could lure Vodafone's customers away with its 'quad-play' bundles of TV, broadband, mobile and landline services.
A merger could also deepen Vodafone's foothold in the German cable market, nearly doubling the group's customer base to 25m homes. But German regulators would likely demand substantial concessions; they're keen to limit cable providers' clout with broadcasters and power over housing associations, whom the government practically forces to provide cable TV to tenants. An even bigger draw for Vodafone might be Liberty Global's operations in Belgium, Austria and Switzerland - countries where it doesn't operate.
Vodafone might seem like the big winner from an arrangement. And it might have the upper hand in negotiations, as a deal would save Liberty Global the cost and hassle of building its own UK mobile network or paying to use those of EE or O2. Both companies have something to gain, and neither is averse to dealmaking. Mr Malone is a major stakeholder in Charter Communications, which recently agreed to acquire Time Warner Cable for just shy of $57bn. Liberty Global has acquired Virgin Media, Netherlands-based Ziggo and Base, and taken a stake in ITV in recent years. Meanwhile, Vodafone has bought Cable & Wireless Worldwide, Kabel Deutschland and Spanish cable group Ono, and sold its stake in US carrier Verizon Wireless.
If the pair thrash out a deal, it would be the latest in a string of tie-ups in the telecoms space. Operators have teamed up to meet surging data demand, broaden their range of services to offset flagging landline sales, weather regulators' price cuts and fight off fierce competition. For instance, Three owner Hutchison Whampoa looks set to acquire O2, while data centre groups Interxion and Equinix are jostling to buy UK rival Telecity. The upshot has been that over $300bn in deals have been struck in the tech, media and telecom industries this year - the highest level since 2006.
