Vodafone's US mobile business is going gangbusters and a possible spin-out could make it much easier to value the mobile giant's American assets.
Vodafone
(LSE: VOD)
hasn't been a great stock market performer in the last couple of years. While the FTSE 100 as a whole has risen 33% since the end of October 2004, Vodafone's share price has slipped 3%.
One of the reasons for the poor performance has been concern about Vodafone's 45% stake in US mobile operator Verizon Wireless (VW). Vodafone has wanted to take full control of VW in the past, but co-owner Verizon Communications
(NYSE: VZ)
hasn't been willing to sell its 55% share.
However, the US picture now looks a little rosier for Vodafone shareholders. For starters, Verizon recently announced plans to spin-out its directories business into a separate listed company. That has prompted speculation that Verizon might consider demerging VW, which would be great news for Vodafone.
A demerger could enable Vodafone to launch a full bid for VW, although I suspect that would be unlikely -- institutional investors might not be supportive of a big takeover at the moment.
But a demerged VW would offer another advantage. It would make it easier for investors to value Vodafone's stake -- they could just refer to the VW share price. That would make it easier to do a "sum of the parts" valuation of Vodafone, and could boost the share price as a result.
Let's be clear. I'm not saying that Verizon will definitely spin out its VW business. Far from it. I'm just relying on speculation in one analyst note from broker Seymour Pierce. If I had to put money on it, I reckon that Verizon will still retain its 55% stake in a year's time.
However, even if VW isn't spun-out, Vodafone shareholders can take comfort from the fact that the US business is doing very well. In terms of revenue it's just overtaken Cingular to become the largest network operator in the states. What's more, revenues are up 18% since the same quarter a year ago while the EBITDA margin is very attractive at 45%.
And don't forget, Vodafone currently trades on a price/earnings ratio of 13 for this year. That looks quite attractive to me, especially given that VW is doing well.
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