Vodafone Group Plc (VOD) is exploring a combination with John Malones Liberty Global Plc (LBTYA) that would create Europes largest phone, Internet and TV company, worth more than $130 billion, people with knowledge of the matter said.

The British phone company is holding internal deliberations and analyzing the financial and regulatory hurdles as well as investor support for a share-based transaction, the people said, asking not to be identified because the matter is private. No formal negotiations with Liberty are under way, theres no guarantee a deal will be reached, and valuation and regulatory issues remain key obstacles, the people said.

In particular, Vodafone has concerns about the combined companys debt levels and the reaction of its own investors to a deal, one of the people said. Cable operator Libertys shares climbed 7.4 percent to $51.99 yesterday in New York. Vodafone shares closed up 2.9 percent in London.

The case for a combination has been strengthened after BT Group Plc, the former U.K. phone monopoly, entered talks to buy either Telefonica SAs O2 unit or EE, the wireless carrier co-owned by Orange SA and Deutsche Telekom AG, two of the people said. The likelihood of a deal has also increased as Vodafone bolsters its fixed-line operations and Liberty moves toward offering mobile services in some markets, they said. While Vodafone is examining several options in the wake of BTs negotiations, Liberty remains the likeliest partner for a transaction, one of the people said.

John Malone, chairman of Liberty Media Corp. Close

John Malone, chairman of Liberty Media Corp.

Close

John Malone, chairman of Liberty Media Corp.

Liberty, which owns Virgin Media in the U.K., has a market capitalization of $39.4 billion and $41.1 billion in total debt after a series of European acquisitions, according to data compiled by Bloomberg.

Vodafone, which has a market value of about 62 billion pounds ($97 billion), has been adding cable assets across Europe as the telecommunications market moves toward bundled packages combining TV, phone and broadband services. After agreeing to buy Germanys Kabel Deutschland Holding AG for 7.7 billion euros ($9.6 billion) last year, it acquired Grupo Corporativo Ono SA of Spain. Chief Executive Officer Vittorio Colao, when asked in September whether Liberty Global would be a good fit for the wireless carrier, said he would consider buying it for the right price.

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Vodafone Said to Eye Takeover of Malones Liberty Global