Vodafone should move quickly and acquire Liberty Global, Merrill says

25th Feb 2015 14:54

'Strike while the iron is hot' was the recommendation from analysts at Bank of America-Merrill Lynch to Vodafone's management, recommending the mobile operator buy US cable giant Liberty Global.Competition in the Indian market is heating up, which will weigh on the FTSE 100 company's free cash-flows and dividend payouts.The group also needs a strategic solution for its lack of fixed line and last mile access, making an acquisition of Virgin Media owner Liberty attractive.At the EBITDA level there is an overlap of 53% and a purchase of its rival would raise its fixed household coverage in its key German, UK, Dutch and Irish markets.So, if it does not strike now Vodafone risks dividend pressures coming together with shareholder dilution and competitive decline in a delayed deal, the analysts said in a research report e-mailed to clients on Tuesday.In December, following growing speculation of a potential takeover, Vodafone chief Vittorio Colao denied he was planning a takeover of Liberty.Merrill mooted an offer at 11 times' Liberty's operating profits, on an EBITDA basis, as a likely scenario.The broker highlighted that the Indian auctions are imminent, with Vodafone "on the hook" for between $3.6bn and $5bn. That is "under-represented" in consensus forecasts for the company's net debt, the report stated.Together with the entry of a new player, R-Jio, into the sector in India, the telecommunications group will be forced to stretch out its cash flow to meet markets' expectations for dividend growth.The near-term outlook for the firm's dividends per share (DPS) is "credible" at 11.2p, but Bank of America lowered its estimate for mid-term DPS to 10% below consensus as a result of the above concerns.As of 14:50 shares of Vodafone were 1.15% lower at 224.3p. They fell in the previous session as well, against the backdrop of a rising market, on the heels of this broker report.