Vodafone and Liberty get square peg in round hole

February 16, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Vodafone and Liberty Global appear to have forced a square peg into a round hole in order to get their Dutch joint venture off the ground. The UK mobile giant’s accord with John Malone’s Dutch unit Ziggo looks almost too harmonious.

Joining forces would produce a local powerful player to compete with incumbent KPN by selling a “converged” package of TV, broadband, landline and mobile services. Vodafone boss Vittorio Colao said it was like putting together a soccer dream team with Lionel Messi and Cristiano Ronaldo. That sounds great, but what is each player worth? Well, the pair agrees that there is a 2 billion euro gap in equity value. To bridge the shortfall and equalise the shareholding, Vodafone will contribute 1 billion euros in cash and no debt to the venture.

On actual valuation though, the harmony is less obvious. Liberty says the enterprise value of Ziggo is 14 billion euros, or about 11 times its 2015 EBITDA. Subtract net debt of 7.3 billion, and that leaves an equity value of about 6.7 billion euros. Reverse engineering would give a 4.7 billion euro value for Vodafone. Yet on a conference call, Vodafone said it valued Ziggo’s equity at 6.1 billion euros, and its own at around 3.9 billion euros. On those numbers, Vodafone Netherlands is being valued at about 6.6 times 2015 EBITDA, and Ziggo on 10.5 times.

Assuming the deal closes as planned later this year, it will test whether Vodafone and Liberty can work together and collaborate in other places like Germany or the UK. Sharing management will be a challenge, and the Dutch operation will have net debt of five times its EBITDA – much higher than what Vodafone is used to. Vodafone must hope Messi and Ronaldo can go from rivals to teammates. If they can’t, there is a safety valve: either side can opt to float the business three years down the line, or sell out after four – and in the meantime, synergies with a present value of 3.5 billion euros make it worth a kickabout.

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