Vodafone may be looking to sell its German business to Liberty Global while acquiring Virgin Media, Liberty's UK cable subsidiary, according to an analyst at Exane BNP Paribas.

The UK-based operator today confirmed it is in talks with Liberty Global Inc. (Nasdaq: LBTY) about an asset swap following earlier speculation that the two companies were interested in merging their European operations. (See Vodafone in Asset-Swap Talks With Liberty.)

Emphasizing that it was not talking to Liberty about a full merger, Vodafone Group plc (NYSE: VOD) did not indicate which assets were the subject of discussions. But Kohulan Paramaguru, an analyst with Exane BNP Paribas, believes the operations in the UK and Germany could change hands during a deal.

An agreement would see Liberty take control of Vodafone's German business and Vodafone assume ownership of UK cable operator Virgin Media Inc. (Nasdaq: VMED), according to Paramaguru.

Vodafone's share price had fallen by 1.7% in trading in London by 12.40 p.m. and Paramaguru says this is evidence "the market is disappointed" that discussions are about an asset swap rather than a merger.

"Many would consider Germany the best mobile market in Europe and to be a truly integrated European player you would need a presence in Germany so selling it would be almost an admittance of defeat by Vodafone management," he went on to say.

Vodafone completed a €7.7 billion ($8.6 billion at today's exchange rate) takeover of Kabel Deutschland GmbH , Germany's biggest cable operator, in late 2013, but has recently been struggling in the German mobile market, where it faces competition from low-cost rivals as well as a resurgent Deutsche Telekom AG (NYSE: DT).

"Germany is an important market and our performance is not satisfactory," said Vittorio Colao, Vodafone's CEO, in response to questions during the operator's recent earnings call for the January-to-March quarter. "We have re-pricing issues that are biting and we needed to focus earlier on branded connections and the direct channel and that's taken a bit of time." (See Vodafone May Buy Content to Fight BT, Telefónica.)

Liberty Global already owns Unitymedia GmbH , Germany's second-biggest cable operator, but acquiring Vodafone's assets would give it a bigger share of the broadband market as well as a strong mobile capability.

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Liberty has recently beefed up its mobile presence in Belgium through a €1.325 billion ($1.5 billion) takeover of KPN Telecom NV (NYSE: KPN)'s BASE subsidiary, having previously used the network of Mobistar SA , Belgium's number-two mobile operator, to provide mobile services. (See Telenet Buys KPN's BASE in $1.4B Deal.)

At the time, Liberty said it wanted to secure "long-term access conditions" through the BASE deal.

Vodafone, meanwhile, is looking for ways to become a "quad-play" provider in the UK, where there is a risk that a merger between BT Group plc (NYSE: BT; London: BTA) and EE -- the country's fixed and mobile market leaders -- will be able to lure Vodafone's mobile customers to bundles of fixed voice, broadband, TV and mobile services. (See BT Locks Down £12.5B EE Takeover Deal.)

Bought by Liberty for $24 billion in mid-2013, Virgin Media operates the UK's third-biggest broadband network by customer numbers, trailing BT as well as pay-TV giant Sky , but depends on a wholesale agreement with EE to support its mobile offerings.

Clearly, a merged Vodafone and Virgin Media would have less need to rely on network deals with other players to provide broadband and mobile services.

Paramaguru did not say whether operations in other European markets are also the subject of talks between Vodafone and Virgin Media, but both players are present in the Czech Republic, Hungary, Ireland, the Netherlands and Romania.

The Exane BNP Paribas analyst says there is opportunity for "value creation" through an asset swap but would prefer to see a merger.

"We still believe our core scenario of a business combination has a higher likelihood of happening," he says.

— Iain Morris, , News Editor, Light Reading