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It’s Now Spring For Vodafone Group Plc

A version of this article originally appeared on Fool.com

WASHINGTON, DC — The U.K.-based telecom giant Vodafone Group (LSE: VOD)(NASDAQ: VOD.US) recently announced a plan to increase spending on infrastructure by 30%.

It will use a portion of the proceeds from the pending sale of its stake in Verizon Wireless to fund an upgrade of its wireless network on the European continent and in emerging markets. Capital spending in its corporate business will also go up.

Vodafone stock will be one to consider because of the plan. Other developments may also boost prospects for shareholders. 

Spring into action

The bulk of the $130 billion that Vodafone will receive from Verizon after the sale will be returned to shareholders.

However, under Vodafone’s Project Spring, until early 2016 up to $9.6 billion will be used to beef up the company’s wireless network. Half of that total will be spent in Europe and Turkey in a bid to fend off increased competition there. 

Vodafone will use the improvements to get a leg up on rivals, such as Telefoncia and Deutsche Telekom, which will likely lag behind on capex, and overall growth. They won’t have the financial muscle that Vodafone has because of its new cash horde.

Return to sender

Vodafone shareholders are likely to receive around $84 billion from the sale of the company’s 45% interest in Verizon Wireless. That alone makes Vodafone stock attractive, at least in the short term.

However, over the long term, the anticipated growth derived as the result of Project Spring might be needed to help fund and grow the dividend, presently at $2.06 per share. 

Therefore, both developments are important for Vodafone investors.

Can you hear me now?

The divesture is also important for holders of Verizon stock. The company jumped at the chance to completely control the wireless operation and keep all of the profits instead of sharing them with Vodafone. 

However, it remains to be seen if the debt Verizon has taken on doesn’t strangle its business. Things could work out fine and more value will be returned to shareholders but the company will have to effectively manage the $60 billion financing package. 

Elephant in the room

However, the elephant in the corner of the room right now is AT&T, which has expressed an interest in scooping up the European operations of Vodafone in a potential blockbuster deal worth about $175 billion. The proposed Project Spring could hasten such a deal.

This would provide another gusher of cash to Vodafone shareholders and an opportunity for AT&T to grow beyond its current pace by expanding into a new market. The company might feel that the U.S. market, where it is No. 2 behind Verizon, is saturating. 

The takeover would also vault AT&T higher into the stratosphere of mega companies. AT&T presently has a market cap worth around $184 billion. There would be strength in (larger) numbers for the Dallas-based AT&T and its investors.

Foolish conclusion

A proposed plan to boost capital spending by Vodafone, using funds from its divesture of Verizon Wireless, could benefit their shareholders in either of two ways.

It’s possible that Project Spring would leave Vodafone’s European competitors, who can’t afford any big outlays, in the dust. And it can also sweeten a takeover deal that AT&T would like to consummate with them as soon as possible to increase the American company’s own growth prospects and return value to their shareholders.

Verizon Communications will take over complete control of Verizon Wireless early next year. That deal was designed to bump up its own profit picture. However, the company probably won’t be going on any more spending sprees until it can knock down some of the debt taken on.

Getting paid to wait

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> Mark owns shares of AT&T and Vodafone. The Motley Fool has recommended shares in Vodafone.