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* Investors waiting for progress in European operations
* Vodafone should float Indian mobile business - bankers
* Liberty deal could return to frame in 12-18 months
By Leila Abboud, Pamela Barbaglia and Kate Holton
LONDON, Oct 7 (Reuters) - With a $120 billion merger withLiberty Global off the table, Vodafone bossVittorio Colao needs his strategy of higher network investmentsand acquisitions of European cable companies to start payingoff, quickly.
The world's second-largest mobile operator abandoned talkswith John Malone's Liberty last week over valuationdisagreements that would have seen a swap of assets or a broadermerger that could have helped Vodafone, in one fell swoop, offermobile, broadband and TV in its biggest markets.
Instead the focus now returns to the unglamorous effort toget revenues and profit growing steadily again, especially inGermany and Spain where Vodafone spent 15 billion euros buyingcable players Kabel Deutschland and Ono to compete with localleaders Deutsche Telekom and Telefonica.
In addition to operational progress, several bankers saidVodafone should also move ahead with floating its Indian mobilebusiness, its biggest emerging market holding, so as to show thevalue within the company.
One person familiar with the situation said management focuswould now return to running its biggest markets, includingattacking the former state-owned monopolies that it competeswith on regulatory and commercial fronts.
"We really need to see an operational turnaround in Europein this fiscal year. That is priority number 1, 2, and 3,including the integration of cable assets in Germany and Spain,"said Bruno Grandsard, a portfolio manager at Axa InvestmentManagement, Vodafone's tenth-biggest shareholder with a 1percent stake.
"Then they need to continue to develop an approach toaccessing fixed assets in markets where they don't have themlike Britain, Italy, and the Netherlands."
Were Vodafone to make those improvements, it would not onlykeep investors on side but put the firm in a stronger positionfor when Liberty comes calling again - as it is expected to do.
Bankers believe a Vodafone and Liberty deal holds thepromise of some 20 billion euros in cost savings - largelyreaped from Britain and Germany - which could draw the pair backto the table in about 12 to 18 months time.
Another factor is what happens to the relative valuations oftelecoms and cable, which could determine who has the upper handin future talks and whether a largely share-based deal ispossible. European telecoms are trading around six to 6.5 timesforward earnings for next year, while cable is 8.5 to 9 times.
People close to both companies said the firms had not yetgiven up on a deal and were separately examining options for afuture attempt.
TUMULTUOUS TIMES
The would-be alliance between one of Europe's biggest mobileoperators and its biggest cable provider is emblematic of thetumult in the industry as carriers in the region increasinglysell all-inclusive bundles of fixed and mobile communications,along with television and broadband.
It also comes amidst a wider mergers and acquisitions spree,which has redrawn the map in several markets, and promptedscrutiny from competition regulators who recently blocked a dealover concerns that people would pay higher prices.
The move to so-called triple and quad-play bundles, which ismost developed in France and Spain and growing in Britain andGermany, also reflects the need operators have for strong fixednetworks to carry ballooning mobile data traffic.
Vodafone's answer has been not only to buy up some cablecompanies, but also to spend 19 billion pounds ($29 billion) onupgrading its networks globally. The investment programme dubbedProject Spring has six months left to run.
In its biggest market Germany, where Vodafone bought KabelDeutschland (KDG) in October 2013, the carrier has struggled tokeep up with Deutsche Telekom. Service revenuedropped 3.2 percent in the year to March 2015, excluding KDG,although in its most recent quarter, when it included KDGnumbers, it was down only 1.2 percent.
Strategic errors such as focusing network investments onrural areas rather than urban, and a badly executed plan to sellmore mobile contracts directly to consumers rather than throughretail partners also caused problems.
Nor has the picture been much brighter in Britain whereVodafone could be weakened by a wave of dealmaking.
Broadband leader BT has agreed to buy the biggestmobile operator EE, and number four mobile player Hutchison's 3 is hoping to swallow Telefonica's 02, whichwould leave Vodafone in third place in its home market.
Vodafone is planning on launching its own pay-TV service inBritain but the offering is likely to be weak in comparison tothose offered by BT and market leader Sky.
"Vodafone needs to show that quad play works - they spentbillions on cable deals, they need to show it was worth it," asector banker said. "Usually you need at least 2-3 years afterdeals to see if it worked well or not, so the crunch period iscoming."
Vodafone's shares have fallen 4.6 percent this year whilethe European telecoms index is up 4.5 percent.
EMERGING MARKETS
In parallel to the work in Europe, some bankers believeVodafone must streamline or separate its emerging marketbusinesses, the largest of which are India, South Africa, andTurkey, to facilitate a deal with Liberty, which is only presentin Europe and Latin America.
Given the companies respective market capitalisations, withVodafone worth 57 billion pounds ($83 billion) and Liberty $39.9billion, hiving off Vodafone's emerging market units would makestructuring a deal easier since it could then combine theremainder of its Europe activities with Liberty.
Liberty saw Vodafone's emerging market business as astumbling block in the recent talks because it could not judgeits quality or value.
Vodafone has said it is weighing the idea of an initialpublic offering in India. A long-running tax dispute and anupcoming spectrum auction could make valuing the unitchallenging.
"Vodafone needs to maximize value from their emerging marketholdings in order to have more flexibility and more optionalityto negotiate a better deal with Liberty," another banker said.
"This is a key step and it doesn't matter whether theemerging market deals happen before or during negotiations withLiberty, what matters is that the right structure is in place."($1 = 0.6577 pounds)($1 = 0.6566 pounds) (Additional reporting by Paul Sandle and Emiliano Mellino;editing by Susan Thomas)
