Content. This is the real value of any deal between Vodafone (VOD) and John Malone's US-based Liberty Global (LBTYA). In an increasingly converging communications space operators have to have the complete tool kit to offer customers. That means calls (declining), texts (becoming less used), email (on the rise), super-fast internet (soaring data consumption), and something to entertain (content is king).
This is what quad-play is all about, selling a full package of services to customers from which better profit margins can be extracted. Satellite broadcaster Sky (SKY) has coughed up a fortune to keep the lion's share of Premier league footie, and has snagged the mobile phones angle through its mobile virtual network operator (MVNO) deal with O2. BT (BT.A), as we have explained countless times in Shares, 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.
Both moves have put Vodafone under increasingly pressure, which explains today's tentative talks with Liberty. Whether this ends up as a full merger (doubtful) or some sort of asset swap (possible) remains to be seen, but there is little doubt that some sort of agreement would create a European communications powerhouse.
'Liberty Global, which acquired Virgin Media in 2013, generates the majority of 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 Megabuyte's Mike Rogers.
Yet Vodafone's careful wording - 'not in discussions with Liberty Global concerning a combination of the two companies' tells us plenty about the tricky regulatory hurdles any deal must overcome.
Analysts at broker 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 the potential value destruction of a merger, or asset sway. Investors are used to synergies creating savings in acquisitions, but sometimes they do the opposite. Losing its pan-European footprint could be a big blow to Vodafone, assuming its had to handover operations in, say, the Netherlands, Romania and Hungary. The group's enterprise market success (27% of group revenues last year) has much to do with how the Vodafone Global Enterprise division has been extracted from national silos. Purchasing power could also be eroded.
Interestingly, Vodafone itself has previously stated its scepticism about the ability of joint ventures to function in a coordinated way.
Vodafone shares are down today (5 June), off around 2% at 243p. The market is doubtful that a meaningful deal can be struck, and is fearful that potential benefits may be outweighed by risk and value erosion. Vodafone may have to look elsewhere for a deal to compete with its chief rivals.