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By Sinead Cruise and Kate Holton
LONDON, May 28 (Reuters) - Some of the biggest investors inVodafone say they are open to a European tie-up withLiberty Global, as the British company is now in astronger position to negotiate a deal with John Malone's cablegroup.
Shares in the world's second largest mobile operator hit a14-year high last week after Liberty's billionaire chairmanMalone said a much-mooted union would be a "great fit" for hiscompany.
The positive reaction stands in contrast to previousoccasions when talk of a deal sent shares in Vodafone tumblingon fears that it, as the suitor, would overpay in order to snareLiberty, Europe's biggest cable operator.
"There is a strategic rationale to the combination of theassets," one top 10 shareholder in Vodafone told Reuters oncondition of anonymity.
"And until last week, the market assumption had been thatVodafone was coming from a position of weakness. What haschanged with John Malone's comments is that the conversationbetween the two parties might actually be a more equal one."
Vodafone, which has 446 million mobile customers incountries ranging from Albania to Ireland, Qatar, India, SouthAfrica and New Zealand, has lost ground to some rivals in anindustry-wide trend to provide internet broadband, TV, homephone and mobile services in one bundled product, known asquad-play.
It has already bought cable networks in Spain, Germany andBritain, with the higher-capacity network also helping to carryits mobile traffic. But some analysts believe a purchase ofLiberty Global could enable the two companies to create theleading network in Europe in one go.
Liberty has also recently bought a mobile operator inBelgium, in a change of strategy after previously suggesting itdid not need to own its own mobile operations and could insteadrent capacity from rivals.
Liberty has a market capitalisation of about $49 billion andVodafone's is around 67.3 billion pounds.
Analysts estimate that a deal could result in grosssynergies of around 16 billion pounds ($24 billion).
Malone's comment, in an interview to Bloomberg, that therewould be "very substantial synergies" if they could find a wayto combine the businesses "with respect to western Europe" hasalso sparked speculation that Vodafone could demerge itsfaster-growth emerging market operations to make it happen.
Two top 20 investors at Vodafone and four smaller investorssaid they would not want to see the group feel pressured tooffload assets quickly and cheaply to hold Malone's interest.
"Liberty are still fractionally more in the driving seat butthe deal makes strategic sense for both parties ... For theperfect quad play, they need Vodafone as much as Vodafone needsthem," one investor said, who declined to be named in line withhis firm's media policy.
"There's no way Vodafone should let go of the AMAP businesspurely in the hope of striking a deal. Everything would have tohappen together," the investor said, in reference to Vodafone'sAfrica, Middle East and Asia Pacific business.
BIG BARRIERS
Some shareholders, who said they had raised the merger ideadirectly with the company in recent weeks, said executives weresurprisingly open to talking about its merits and drawbacks.
There are many barriers to the deal. The two companies onlyhave overlap in a few countries, including Britain, Ireland, theNetherlands and Germany and of those, only two are big enough towarrant such a deal.
Malone himself also noted that there are philosophicalissues with the way the firms are run, with Vodafone relativelylowly leveraged and paying dividends, while Liberty has highdebt and prefers buybacks.
Vodafone, with its relatively corporate brand, also likes totout its broad geographical spread to enable it to offer globalcoverage to multinational firms.
Still, investors say Vodafone is looking at its optionsafter Malone signalled the change of tone. If a full mergerproved too complicated, the two sides could look at country bycountry deals such as in Britain where Vodafone could partnerwith Liberty's Virgin Media.
"I would say that this has been prime focus in the Vodafoneboardroom for some time now," said David Lis, chief investmentofficer in equities and multi assets at top 20 shareholder AvivaInvestors.
"They must have done a huge amount of work understandingLiberty. It is an open secret, it is much discussed that theyare the last people who could do a deal if Vodafone are to bringtheir business to a wider platform."
Given Vodafone's strategic challenges, dividend fans in itsshareholder base are unlikely to oppose a sensibly structureddeal that offers some token income, the investors said,confounding earlier speculation that many could balk atLiberty's high leverage and preference to reward with buybacksinstead.
"It is starting to look like a company that is under a bitof pressure and a merger might alleviate some of that pressure,"said Chris White, head of UK equities at Premier AssetManagement, which is a Vodafone shareholder.
"But it would probably be dressed up with a dividend cut, inother words, Vodafone would start to be looked at as an equitygrowth company rather than an dividend income story."
Vodafone declined to comment. ($1 = 0.6548 pounds) (Reporting By Sinead Cruise.; Writing by Sinead Cruise and KateHolton. Editing by Jane Merriman)
