Did BT Group plc Actually Tell Me To Bet On Vodafone Group plc This Week?

It looks like BT Group plc (LON:BT.A) is going to pay top dollar for EE, which is bad news for shareholders, argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT (LSE: BT-A) (NYSE: BT.US) has entered exclusive talks to acquire EE for £12.5bn, it emerged earlier this week. Dear me…

I appreciate BT is churning out cash, but such an expensive deal heightens the risk associated to BT stock into 2015. 

I am not buying Vodafone (LSE: VOD) (NASDAQ: VOD.US) instead, however. I’ll explain why.

Mr Market 

BT stock has outperformed the FTSE 100 index by almost 10 percentage points since it confirmed, on 24 November, that it was considering a takeover of Telefonica‘s O2 mobile operations in the UK. A couple of days later, EE’s owners — Deutsche Telekom and Orangeannounced they were “in exploratory discussions” with BT. 

Short-term movements in stock prices do not dictate investment strategies, but they should not be overlooked, either.

Since 5 December, when BT stock rose to 420p, the shares have lost 5.4% of value. The FTSE 100, by comparison, has lost 5% of value over the period. It could be argued that BT shares should have fared much better than the index in the wake of M&A talks.

Furthermore, since BT announced earlier this week that it was in exclusive talks to buy EE, its stock has underperformed the market by about three percentage point.

Why so? 

An Expensive Call

The purchase price of £12.5bn for EE on a debt/cash free basis isn’t good news for shareholders.

In short, BT is valuing the target’s equity at 2x sales and 8x earnings before interest, taxes, depreciation and amortisation (Ebitda). That is premium of about 20% to BT’s own valuation. BT should have asked for a 20% discount against its own valuation, in my opinion, or should have opted to go for O2, which is smaller but has a decent network. 

The implied valuation of EE is demanding even assuming BT can achieve synergies of between 5% and 7% of the EE’s revenues (between $320m and £450m annually). While BT says that “in considering the financing of the cash element, BT has a range of options and is mindful of the importance of maintaining a conservative financial profile”, it looks like the British behemoth is paying too much for assets that may promise significant synergies, but whose Ebitda and revenue growth prospects are not particularly appealing. 

Vodafone Is Still Expensive

Does BT’s strategy suggest it may be time to bet on Vodafone? Well, maybe — although Vodafone stock is not exactly in bargain territory right now.

Vodafone shares, which trade at 223p, have been resilient in the wake of upbeat quarterly results, which showed an improvement in its operations. M&A talks also contributed to value creation in recent weeks.

I may add Vodafone to my diversified portfolio — but only if it drops to 170p/180p. And even then, I would not feel very comfortable retaining a meaningful exposure. I think Vodafone’s dividend, its main attraction, is jeopardised by its capital structure, which is stretched.

Just like BT, Vodafone may decide to become a fully fledged quad-play services provider, but it’ll have to engineer a multi-billion takeover of Liberty Global. An alternative would be to acquire Fastweb, which is another takeover target, according to the rumour mill. 

For now, I’d look elsewhere for value. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »