UK mobile giant Vodafone (VOD) could be forced in to ‘transformational’ mergers and acquisitions in an attempt to remain competitive amid escalating sector consolidation. This may see the group overpay for assets and prompt investor fears of value erosion ahead.

Vodafone has invested £19 billion in its ‘Project Spring’ programme to upgrade 3G and 4G connectivity across Europe, yet this may not deliver the promised return to growth. ‘Project Spring has not future-proofed Vodafone in the UK and the company may now find itself acting defensively to combat BT,’ say analysts at Jefferies.

The City has been rife with gossip of potential targets recently, with a deal for US-listed Liberty Global (LBTY:NDQ) widely predicted. It owns Virgin Media, which would bring instant access to around 4 million low-churn customers with a proven willingness to pay premium prices for high-speed broadband. Yet such a deal would be expensive, and potentially value eroding, with an offer somewhere close to $60.00 per share likely to be required. That would imply an enterprise value (EV) for Liberty of $59 billion, according to Jefferies’ calculations, a figure that could increase gearing and cut dividend cover, depending on how the deal was structured.

Issue Date: 07 Jan 2015