NEW YORK ( TheStreet) -- If billionaire media mogul John Malone does decide to merge his sprawling international cable-TV company Liberty Global (LBTYA) with the U.K.-based wireless carrier Vodafone (VOD) , it's more than likely the deal would be structured as an all-stock transaction to avoid most taxes, said corporate tax consultant Robert Willens.
Malone, as famous for shaping cable-TV in the U.S. and the world as for his aversion to paying taxes, is said to be considering overtures from Vodafone to combine the two companies, according to a report from Bloomberg News. Vodafone, which operates mobile-telephone service throughout Europe, Asia and parts of South America, is under pressure to acquire fixed-line assets to offset rival BT's (BT) efforts to acquire a wireless provider in the United Kingdom.
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Vodafone covets Liberty Global's extensive broadband network as more media companies offer news and entertainment offerings online that historically have been available only through cable or satellite-TV. Malone, who is also chairman of Liberty Global as well as Liberty Media (LMCA) and Liberty Interactive (QVCA) , has long made acquisitions based in part on whether he could avoid paying taxes.
"If he were to do a deal, it would have to be structured as a tax-free reorganization," said Willens, who worked at Lehman Brothers for 20 years prior to the firm's dissolution in 2008. "That would mean Vodafone would pay in stock, exchanging their shares for Liberty shares in a tax-free merger transaction."
For Malone to avoid paying taxes in a deal, he would have to enter into a so-called gain-recognition agreement as he would likely emerge from such a transaction holding a stake greater than 5% in a combined company, Willens added. A gain-recognition agreement, he said, would require Vodafone to agree not to sell Liberty Global for five years. If Vodafone were to sell off Liberty Global within five years, the tax-free exchange would become retroactively taxable, Willens added.
"Undoubtedly, if they did one of those deals, there would be a clause in the merger agreement that would prohibit Vodafone from disposing for Liberty Global for at least five years," Willens said, adding that Daimler Benz and Chrysler had a similar arrangement in their 2008 merger in part to appease Chrysler shareholder Kirk Kerkorian.
Some shareholders, though, could receive cash as long as 40% of the transaction is in stock, Willens said. To execute a cash-and-stock transaction, the companies would have to create a mechanism whereby Malone gets the stock and all other shareholders get the cash. "That may be what everyone would want, but I'm not sure how that would be done," he said.
Shares of Englewood, Colo.-based Liberty Global were falling 1.5% on Monday to $51.19, trimming some of Friday's gains when the stock surged 7.4% on the news. Vodafone shares traded in New York were also dropping, losing 2.7% to $35.58.
To acquire Liberty Global, Vodafone would have to offer a deal valued at $83 a share, a 60% premium to the stock's current price, said James Ratcliffe, a media analyst at Buckingham Research in an investor note published Monday. As such, Malone has less of a need to combine with Vodafone than vice versa given that he would have an easier time adding a wireless business than Vodafone has of adding a wireline business capable of selling Internet and television services, he added.
"We note that Liberty Global can be patient," Ratcliffe said. "We view the asset as unique in the European telecom market."
If Malone were to agree to a deal with Vodafone it would mark another turning point in a long career for a man who all but created the domestic cable-TV market. Malone built and headed Tele-Communications Inc. before merging the company with AT&T in 1999. A merger with Vodafone would likely decrease his overall corporate influence as much as it would reflect his dedication to doing deals that reward shareholders.
"The reason investors like investing longtime with Malone is because he always rationale, never emotionally attached to any of his businesses," said Amy Yong, a media analyst at Macquarie Securities said in a phone interview from New York. "It will all depend on how a deal is structured, how much voting rights he would have, whether it's cash or stock, tax efficiencies, seats on the board but whenever there's a Malone entity, they've shown they're open to it."
Liberty Global's revenue for 2014 is expected to surpass $18 billion on operations that serve roughly 27 million customers in markets that include Germany, the U.K., Chile and Puerto Rico. Its market capitalization is $39.4 billion, just about even with its debt load of $41.1 billion, according to data compiled by Bloomberg. Having sold nearly all of his U.S. cable-TV assets in 1999, Malone has spent more than $40 billion buying pay-TV assets in Europe.
A deal would likely pass regulatory hurdles in Europe although some Germany-based assets would likely need to be divested, Ratcliffe added. Requests for comment from Liberty Global and Vodafone weren't immediately returned.
-- Written by Leon Lazaroff in New York
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