Vodafone, Liberty Call Off Asset-Swap Talks

Talks between Vodafone and Liberty Global about an exchange of European assets have been abandoned, Vodafone has announced in a statement.

The two service providers had confirmed they were in discussions in July following long-running speculation about a full-blown merger between the two players, both of which operate networks across a number of overlapping European markets. (See Vodafone in Asset-Swap Talks With Liberty and Liberty Global Keen on Vodafone Tie-Up – Report.)

Vodafone Group plc (NYSE: VOD)'s share price had fallen by 4% in early-hours trading on the London Stock Exchange following news of the development.

An asset swap could have allowed each company to expand its portfolio of service offerings, enabling Vodafone to further beef up its cable broadband capabilities while giving Liberty Global Inc. (Nasdaq: LBTY) control of mobile networks in key markets.

Analysts in contact with Light Reading had surmised that a deal could see Vodafone quit Germany, where it is currently the country's second-biggest telecom operator, in exchange for Liberty's Virgin Media Inc. (Nasdaq: VMED) cable business in the UK. (See Vodafone Could Buy Virgin Media, Quit Germany, Says Analyst.)

Such a transaction, however, seems likely to have run into opposition from regulatory authorities: The prospect of a merger between Vodafone-owned Kabel Deutschland GmbH , Germany's biggest cable company, and Liberty's Unitymedia GmbH business -- the country's number-two cable player -- would have triggered competition concerns.

Moreover, while Vodafone's German business has been struggling in recent quarters, Germany remains the operator's largest addressable market in the European region and one the UK-based service provider would be reluctant to leave.

Vodafone has been trying to reinvigorate the German operation in the face of tough competition from incumbent Deutsche Telekom AG (NYSE: DT), appointing Hannes Ametsreiter, the former CEO of Telekom Austria Group , to head up the business in June. (See Vodafone May Buy Content to Fight BT, Telefónica and Eurobites: Ametsreiter Heads to Vodafone.)

But the failure of discussions could leave both Vodafone and Liberty in something of a quad-play quagmire, as consumer interest in offerings that bundle fixed voice, broadband, TV and mobile services continues to grow.

Rivals in some key markets have been strengthening their own quad-play positions and could try luring customers away from operators that cannot support the full range of communications and entertainment services.

In the UK, Vodafone may look especially vulnerable following a £12.5 billion ($19 billion) merger between fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) and mobile market leader EE . (See BT Locks Down £12.5B EE Takeover Deal.)

Although Vodafone recently launched its own broadband offering, it remains heavily dependent on a wholesale relationship with BT and is deeply unhappy about BT's growing dominance in the UK telecom sector. (See BT Outlines Conditional Gigabit Vision for UK, Vodafone UK Enters Quad-Play Fray and BT Split Could Spur Vodafone to Invest in Fiber – Colao.)

Following the merger between BT and EE, Vodafone will also be forced to purchase backhaul services from one of its biggest mobile rivals.

For more fixed broadband market coverage and insights, check out our dedicated broadband content channel here on Light Reading.

Just as Vodafone has been trying to acquire fixed-line assets, so Liberty has been eager to build up a mobile operation and terminate its MVNO relationships with network operators.

In April, Liberty's Belgian Telenet business agreed to pay €1.325 billion ($1.48 billion) for BASE , a Belgian mobile operator controlled by Dutch incumbent KPN Telecom NV (NYSE: KPN), so that it could "secure long-term mobile access conditions" and better compete in Belgium's mobile data market. (See Telenet Buys KPN's BASE in $1.4B Deal.)

Previously, Liberty had relied on an MVNO deal with Orange (NYSE: FTE)-owned Mobistar SA , the country's second-biggest mobile operator, to provide mobile services.

Both Vodafone CEO Vittorio Colao and Liberty Chairman John Malone will be under pressure to find alternative means of improving their respective European positions.

— Iain Morris, , News Editor, Light Reading