Vodafone (VOD) and Liberty Global have been inter-twined since 2015 when the two groups first touted the idea of an asset swap. Discussions of takeovers and mergers have played on investor nerves since then due to the potential impact on Vodafone’s balance sheet. It is therefore something of a relief that the outcome of three years of talks looks like a good deal for shareholders.
Vodafone will buy the German, Czech, Hungarian and Romanian assets of Liberty Global for €18.4bn (£16.1bn). The four subsidiaries generated combined revenue of €2.9bn in the 2017 calendar year, €1.6bn of adjusted cash profits (EBIDTA) and €866m of free cash flow, meaning they are expected to be immediately cash flow accretive. With €7.5bn of forecast cost, capex and customer synergies, management is expecting a double-digit boost to free cash flow from the third year after completion, while broker JPMorgan previously forecast 3.4 per cent compound annual adjusted cash profits growth in the next five years.
Crucially, the deal gives Vodafone a firm footing to take on Deutsche Telecom, which has 13 per cent of the fixed broadband market and 18 per cent of TV customers in Germany. Together, Vodafone and Unitymedia – Liberty’s German branch – will have 10 per cent and 14 per cent of the two markets, respectively. Although the size of the transaction means it is likely to be referred to European competition regulators, Christoph Enaux, a lawyer at Greenberg Traurig, thinks it is likely to be approved.
In the Czech Republic, Hungary and Romania, Liberty Global’s businesses will increase Vodafone’s coverage to 39 per cent of total households, from roughly 28 per cent at the end of 2017. Europe is now expected to contribute 77 per cent of Vodafone’s adjusted cash profits in the 2018 financial year.
At 8.6 times cash profits – adjusted for synergies – the valuation looks fair compared with similar telecoms transactions in recent years. More importantly, Vodafone will be issuing mandatory convertible bonds to fund part of the transaction. That means management plans to raise its target leverage range to between 2.5 and 3 times cash profits, from 2 and 2.5 times, and expects net debt to be at the upper end of the revised range at the end of 2018. However, it has confirmed the group will continue to pay a gradually increasing dividend.
