You know what I like about spring? It’s the fact that it is so full of possibility. Yet that possibility has not yet taken full shape.
That’s where we are at the moment with Vodafone (LSE: VOD). Vittorio Colao’s Project Spring was an ambitious grand projet to turn the telecoms giant from a humdrum utility to a company at the leading edge of telecoms and broadcasting.
Can Vodafone turn its vision into reality?
That’s why the firm demerged from Verizon. With the money it made from the demerger, Vodafone would buy up telecoms and broadcasting businesses across Europe and the rest of the world. By choosing these acquisitions strategically, the company would build on its current strengths, and in many countries it would aim to be the market leader.
So much for the grand vision. But what about the rather the more dour and difficult reality?
Well, Vodafone did the easiest things first. In 2013 it bought Kabel Deutschland, one of Germany’s main pay-tv providers. The following year it bought Spain’s leading cable business, ONO. Both companies were folded into Vodafone’s existing telecoms structures in these countries.
So far, so good. But how would the firm spend the rest of its war chest? This is where things get difficult. One of its biggest markets is the UK, where Sky dominates pay-tv. But with a market capitalisation of ÂŁ17 billion, it is too expensive to be seriously considered as a takeover target.
So how about buying Virgin Media instead? The trouble here is that Virgin is part of Liberty Global, which is the world’s leading cable company, owning pay-tv firms around the globe. And the company is valued at a cool $49 billion.
Basically, between them Sky and Liberty own the most successful pay-tv businesses in the world outside of the States. Which means Vodafone has hit a brick wall.
This could be the ideal way to build Vodafone’s portfolio
But in the last few weeks, executives at Vodafone and Liberty have come up with a novel idea: what about an asset swap? Why not buy the juiciest morsels from the other company’s portfolio? It’s a clever idea, and I think it would be the ideal way to build Vodafone’s portfolio strategically.
So what would they buy? I think Vodafone would snap up Virgin Media in the UK, adding the final piece to the company’s offer in this country. By purchasing pay-tv companies such as Ziggo and HBO Netherlands, Vodafone could bundle tv with its mobile offer in the Netherlands.
Liberty also owns a brace of pay-tv businesses in Germany, such as Unitymedia and Kabel Baden-WĂŒrttemberg, which could make Vodafone the biggest tv company in Germany.
And what could Liberty obtain in return? Well, this firm has invested heavily in cable TV and telecoms in central and Eastern Europe. The UPC brand has a strong presence in Poland, Romania, Hungary, Slovakia and Switzerland. Vodafone’s mobile operations in Eastern Europe would further strengthen Liberty’s dominance in this region.
If Vodafone can pull off this asset swap, then I think it will take the next step in turning all the potential of Project Spring into something nearer concrete reality, and I would reiterate my view that this company is a buy.