Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) confirmed this morning that it is in discussions with US cable giant Liberty Global about a possible deal to exchange selected assets.
However, the UK firm ruled out a merger or takeover, saying that it was not in discussions about a combination of the two companies.
Is a deal likely?
Rumours have been circulating for weeks about a possible deal between Vodafone and Liberty Global. Vodafone shares rose sharply in late May, after Liberty chairman John Malone said the two firms western European assets would be a great fit.
However, this mornings statement made it clear that there is no certainty a deal would be reached, nor which assets might be included.
What could a deal involve?
Vodafones assets are split between western European markets and emerging markets. The firms operations in the UK and Germany accounted for 35% of revenue last year.
Like Vodafone, Liberty has a strong presence in the UK (Virgin Media) and Germany. These two countries, plus the Netherlands, were singled out by Mr Malone as being a great fit in a Bloomberg interview in May. Collectively, they account for nearly 75% of Libertys revenue.
Its possible that Vodafone and Liberty might agree to swap or combine assets in these countries. This would enable each company to offer quad play services (mobile, landline, broadband and television) to customers.
A swap such as this could mean that each company ends up with a complete set of cable and mobile networks in a smaller number of countries. Alternatively, a joint venture might be possible.
Emerging market spin-off?
Vodafones emerging market networks are unlikely to be part of any asset swap deal.
However, it is possible that Vodafone might spin-off its operations in Africa, India and Turkey into a new business. According to the FT, a small but significant minority of Vodafones shareholders would favour this approach.
As a Vodafone shareholder, Im unsure about this. Part of the long-term appeal of the company, in my view, is its strong presence in emerging markets. I see markets such as Africa and India as offering greater growth potential than the mature and saturated markets of Western Europe.
The end result?
From the limited information available to us, all we know at present is that Liberty boss John Malone is keen on Vodafones assets in the UK, Germany and the Netherlands.
Id imagine Vodafone boss Vittorio Colao feels similarly about Libertys assets in those countries.
One particular target for Mr Colao could be Libertys Virgin Media business in the UK. Taking control of Virgin Media would mean that Vodafone could offer a quad play service in the UK to compete with BT Group, which is in the process of acquiring mobile operator EE.
Some kind of deal looks increasingly likely, as long as these two very different companies can find a way of working together.
In the meantime, I plan to hold onto my Vodafone shares and focus on new buying opportunities elsewhere.
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Roland Head owns shares in Vodafone. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
