Vodafone and Liberty Global have been in talks for several months about a possible merger or asset swap. They confirmed the talks in June, but recent media reports suggest they are struggling to reach an agreement. Both appear to want the UK activities, Vodafone because the UK is its home market and Liberty Global for the tax-deductible losses at Virgin Media. Liberty reportedly also wants to stay in the Netherlands, while Vodafone would get Germany.
The logic of a merger is clear: it brings fixed and mobile together and the companies already have significant overlap. For example, in the Netherlands, where Vodafone is growing on the fixed market, but still has a very small market share, while Liberty Global's Ziggo is broadband market leader. The downside and risks are also clear. In addition to the general risks of any merger (a long process, possible regulatory opposition, integration failures), the two companies have no overlap outside Europe. A possible spin-off by Vodafone of its non- European activities was not welcomed by Vodacom, its holding company in Africa. Another downside of an asset swap is that neither player achieves pan-European coverage and they can forget about any significant benefits of scale.
Downside to not merging
Not merging also has risks of course. The potential synergies are left unrealised and both parties must continue to develop low-margin activities, in fixed for Vodafone and mobile for Liberty. The European incumbent operators would be the most pleased to see the talks fail. The two also would remain competitors in several markets, rather than eliminating a key rival. Vodafone for example faces the risk that Ziggo acquires T-Mobile Netherlands, creating another integrated fixed-mobile operator alongside KPN. Vodafone also faces an uphill battle in building a position in fixed in markets where Liberty is a strong competitor, such as the Netherlands, Ireland and the UK, while Liberty remains without a strong mobile proposition.
If the talks do fail, then Vodafone will likely continue its search for cable acquisitions and partners for rolling out FTTH. Liberty Global may acquire more mobile operators like Base in Belgium and where necessary develop MVNOs. The consolidation will continue regardless. The most beneficial, but also the most risky scenario remains a complete merger of Vodafone and Liberty Global.
