Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) current strategy sounds extremely prudent in theory. The company is attempting to take a long term view and buy high-quality European assets at distressed prices, thereby putting its bottom line on a potentially fast-moving upward trajectory for many years to come.
The problem, though, is that things in Europe are getting worse. In fact, deflation looks as though it is going to be tough for the Eurozone to avoid, simply because decision-making is slow and the response to economic woes is too mild. As a result, Vodafone’s bottom line (and share price) could come under pressure.
The UK
One potentially sound option is for Vodafone to switch its attention away from the slowest growing region of the developed world and instead focus on the fastest growing region of the developed world: the UK. Certainly, the UK’s debt problems remain severe, but with strong growth expected this year and next, the UK could prove to be an obvious answer to Vodafone’s lack of growth.
With the UK also being in Europe, it could allow Vodafone’s management to ‘save face’ and not be appearing to ditch their cornerstone strategy of investing in Europe.
ITV
With Sky having decided to purchase Sky Italia and Sky Deutschland, Vodafone isn’t left with a vast array of options when it comes to sizeable media companies to buy. One that stands out, though, is ITV (LSE: ITV).
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hat’s because it is a well-run company that has vastly improved the quality and breadth of its content in recent years and is benefitting hugely from the UK’s fast pace of growth.
Furthermore, ITV looks set to grow earnings at a very strong pace in future. For example, in the current year the company’s bottom line is expected to be 17% higher, while next year it is forecast to rise by a further 11%.
That’s 30% growth in just two years which for Vodafone, a company that operates mostly in the anaemically growing Eurozone, must seem like warp-speed.
Looking Ahead
Clearly, ITV operates in a different sector to that of Vodafone. However, with the lines between mobile and media markets becoming increasingly blurred, it could make sense for Vodafone to buy a different type of business. Furthermore, Vodafone’s purchase of Kabel Deutschland is hardly in keeping with its mobile phone history, so a deal for a media company such as ITV could be justified.
With Vodafone having huge financial firepower, a deal for ITV is well within its grasp. As the Eurozone’s demise continues, the pressure on Vodafone’s management to do something to boost its bottom line could become intense. With shares in ITV trading on a price to earnings growth (PEG) ratio of just 0.9, a bid from Vodafone could be at least part of the answer.
