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Liberty Global: a sale in Austria, the Lat Am split off, and the Vodafone question

Stuart Thomson looks at the options facing Liberty Global and Vodafone in an evolving European communications market.

Liberty GlobalLiberty Global has been in the news over the holiday period thanks to two big events – the split-off that created Liberty Latin America as a separate company, and the agreement to sell Liberty Global’s Austrian unit to T-Mobile.

The rationale for the Liberty Latin America split-off is that the conditions faced by the operator are very different from those in Liberty’s more mature and predictable European markets. Liberty Global president and CEO Mike Fries has characterised the region in which Liberty Latin America operates as a high-growth market that presents a “massive consolidation opportunity”. Liberty, in this narrative, is well-placed to act as a consolidator.

A different growth curve, different average revenues per unit, different opportunities, different risks – all of this means a different investment opportunity and it therefore makes sense to split the Lat Am unit off.

In Europe, consolidation is harder going with fewer undervalued assets and – in some instances – more regulatory hurdles to jump. Achieving scale is the goal in both markets, but in Europe Liberty has to use different tools to achieve it. Digging tools, in fact. The operator has embarked on a significant network build-out programme to extend its reach. Advances in technology mean that network build costs are not as prohibitive as they once were. Building out is also well-received by regulators as it helps governments achieve digital inclusion goals.

The Austrian sale also underlines the importance of scale. Fries has consistently said that ‘national scale’ is what matters in Europe and highlighted the challenges faced by the Austrian unit in this respect when he spoke at the UBS Annual Global Media and Communications conference in December. Fries said at the time that Liberty would be a “buyer or a seller” in markets where it lacked scale. The desired end outcome is two major convergent – fixed and mobile – players confronting each other in each country.

This brings us to the other big potential move to create a scale player in European cable – a tie-up or merger between Liberty and Vodafone. The Latin American split-off and the sale of UPC Austria can be interpreted as making a potential merger or combination of the pair more likely by more closely aligning them in Europe.

VodafoneThe rationale for a tie-up is the combination of Vodafone’s mobile reach with Liberty’s fixed-line assets and the complementarity of both mobile and fixed assets in key markets. Germany is seen as the market in which a combination of assets short of a full merger between the pair would make most sense, but a combination of Vodafone and Liberty’s cable assets – creating a dominant national cable operator with a presence across the entire country for the first time – could still face regulatory challenges.

The European overlap between the pair spans Germany, the UK, Ireland, the Czech Republic, Hungary and Romania, as well as the Netherlands, where they have already combined their assets into a convergent player – VodafoneZiggo. In addition, Liberty is present in Poland, Switzerland, Slovakia and Belgium, while Vodafone is in Spain, Portugal, Italy, Greece and Albania.

Renewed speculation about the pair has certainly been fuelled by the Austrian sale. However, whether it happens remains to be seen. Challenges include the differing financial approaches that have proved a hurdle in the past. But resistance may also be bolstered by the fact that both have been doing relatively well on their own.

Previously Vodafone – which has struggled to achieve top-line growth in Europe – has been viewed as the party with most to gain, but the mobile giant has improved its performance of late – particularly in the fixed market, where it has also invested in its own networks. The share prices of both Vodafone and Liberty have been climbing.

Nevertheless, the T-Mobile-UPC Austria tie-up also shows that the other major players are not standing still. Convergence and scale remain the watchwords for cable and telecom operators alike.