VodaMalone

If Vodafone wants Liberty it has to get creative

Deals beget deals, as the cliche has it, but still: BT eyes a $15-billion takeover in UK mobile and Vodafone's measured reaction is to plot a bid for European's largest cable group, Liberty Global, worth $90 billion? That's a strategically ambitious way for Vodafone to counter a new threat to its domestic wireless business. The financial logic is harder to see.

The good news first. Vodafone is buying, building and renting fibre networks, as data use explodes and rivals increasingly bundle fixed and wireless services together. And no other asset matches Liberty. At a stroke it would make Vodafone a powerful "convergent" player in Germany, Britain, and the Netherlands, selling TV, broadband, landline and mobile.

It is true that officials in Germany, where Vodafone already owns Kabel Deutschland, have nixed some deals. But any Liberty deal would probably be scrutinised in Brussels, which is warming to consolidation and hankers after European champions.

Now to the financials. Liberty's chairman, John Malone, controls the group through super-voting shares. He's already on to a good thing: growth and cash generation, amplified by leverage, bring high returns. It's not clear why he and co-investors would sell except for a great price - especially if they got shares in lower-growth Vodafone in return.

As for Vodafone shareholders, they would need to see big value creation that isn't immediately apparent to the market. Analysts at RBC outlined a Liberty purchase at $91.4 billion including debt, or 10 times Ebitda. Even if sellers took 45 per cent in stock, Vodafone's debt would still hit an uncomfortable 3.5 times Ebitda and earnings accretion would not come until 2020. And those Vodafone investors who bought for the five per cent dividend yield could see the payout cut after a deal.

So to make this work, Vodafone will have to maximise cost savings and minimise financial strain. That could mean lining up disposals of non-core Liberty units in Belgium and Switzerland, or even selling Vodafone assets in emerging markets like South Africa or India. Alternatively, it could attempt a much smaller deal, targeting just Liberty's Virgin-branded UK business.

Many things need to go right for a Vodafone-Liberty tie-up to happen. If this is Plan A, Vodafone must have several plan Bs. Those could include British broadband operator TalkTalk, European pay-TV giant Sky - or even BT itself.