Is Vodafone Group About To Receive A Bid?

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By

David O'Hara

Published in Company Comment on 8 January 2013

Speculation rises on the future of Vodafone Group Plc's (LON: VOD) US business.

Reports that Verizon Communications (NYSE: VZ.US) may buy Vodafone (LSE: VOD) (NASDAQ: VOD.US) out of their US joint venture has seen buyers rush to pick up Vodafone shares. This morning, the shares are up 2.6%.

After a disappointing 2012, Vodafone is one of the biggest winners so far in 2013. Since the beginning of the year, share in the telecom's titan are up 5.3% versus 2.9% for the FTSE 100 (UKX) index.

How big might a bid be?

Currently, Vodafone owns 45% of Verizon Wireless (VZW). Verizon Communications (Verizon) owns the majority balance. Verizon's chief executive officer, Lowell McAdam, recently discussed VZW with the Wall Street Journal, saying how Verizon would "love to own all of that asset". Mr McAdam also emphasised not just the desirability of a deal but also its feasibility.

This has led to speculation on how much Verizon would have to pay Vodafone for its stake in VZW.

In 2012, VZW paid Vodafone a total of £5.3bn in dividends following what Vodafone called a "strong performance". The growth that the VZW business is enjoying suggests that these payments to Vodafone could increase in future years.

I expect that VZW is paying out close to all of its profits to its owners. Applying Vodafone's current price-to-earnings ratio of 10.3 to that £5.3bn of cashflow gives an estimated price tag of £54.6bn for Vodafone's stake in VZW. That is significantly ahead of the £50bn that commentators are currently speculating on. Verizon would need to undertake a massive fundraising to buy out Vodafone at those kind of prices.

Currently, Vodafone only receives its dividends from VZW because Verizon is voting for a payout from VZW itself. I don't think that dividends from VZW to Vodafone are in any real danger. Without dividends from VZW, Verizon's own dividend and share price would be under threat.

If Verizon does not want to pay cash for Vodafone's stake, it could structure a deal that would allow VZW to be spun out of the current joint venture. In this scenario, Verizon would own 55% of a separately listed VZW and Vodafone shareholders would get 45%. Verizon might increase its stake in VZW by offering Vodafone shareholders a price for their shares at IPO.

What to do?

I continue to hold shares in Vodafone; the company is a reliable dividend payer. The shares come with an expected yield of 6%, while the company is also using its dividends from VZW to buy back shares in the market, which will help support future dividend growth. There is also the possibility that the buyback will push the shares higher in the short term.

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> David owns shares in Vodafone but none of the other companies mentioned. The Motley Fool has recommended shares in Vodafone.

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Comments

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ANuvver 08 Jan 2013 , 2:38pm

Fascinating stuff.

Just because Verizon is interested in buying Voda out of Wireless (which isn't really news) doesn't mean Voda is willing to sell. The only thing that's changed is that VZN has indicated (believe it or not, as you wish) that they're in a position to make an attractive offer.

I have a suspicion that VZN management are firing a PR advance shot, in the belief that VOD is weak. Weak certainly in terms of recent SP performance, but also re this ludicrous "Indian mutiny" business that's recently resurfaced.

All this really does is highlight the value of Verizon Wireless. Therefore hitching VOD up. I'm not sure whether Lowell is very stupid or very clever. Surely, if you're interesting in buying an asset you don't deliberately talk up its value in advance?

VOD management have so far played a very patient game on this issue. I don't think they have any attention of parting with their Wireless stake on anything other than very beneficial terms. The Mexican standoff continues, but I reckon VZN just blinked.

ANuvver 08 Jan 2013 , 2:42pm

Oh for an edit function...

BigJC1 08 Jan 2013 , 2:42pm

Surely you should be using USA P/E's of comparable businesses in the sector. AT&T is at 45 Verizon at 42, that produces a substantial valuation

paullidd 08 Jan 2013 , 2:50pm

Just a thought, but maybe it's a "you scratch my back" kind of thing. Verizon talk up buying out VOD, the latters SP improves and at some point in the future VOD make it easy for Verizon. They are partners after all so there must be some sort of agreement between them on some issues.
As I say just a thought.

ANuvver 08 Jan 2013 , 3:03pm

Paul:

Oh yeah, interesting thought. The result is to bring to the foreground the cash-generative machine that is Wireless. Could indeed be win-win, baby. Or is it Treasure of the Sierra Madre?

paullidd 08 Jan 2013 , 3:07pm

AN - shame I can'r give you a rec on here. very funny thanks

vinchainsaw 08 Jan 2013 , 4:03pm

Would be nice, but I see no reason for VOD to sell.

Also, my understanding is that VZN is carrying more debt than VOD currently; where will they find another £50bn of extra financing?

If, though, Wireless is worth £50bn, then that means the market is currently valuing the rest of VOD at £30bn?
Wow.

Happy to hold, just haven’t been able to bring myself to top-up yet. Don’t know why, just a little voice inside telling me not to double down.

jaizan 08 Jan 2013 , 7:07pm

PEs of 45 and 42 sound very high, unless these stocks are expected to double earnings in no time at all.

stevejbiggs 08 Jan 2013 , 7:08pm

vinchainsaw, I know what you mean, I currently hold VOD but I'm also hearing a voice telling me not to double down, as the share price seems to be on a downward heading.

dpeddlar 08 Jan 2013 , 7:51pm

You guys should double down, how many people must of had the same thought when Barclay's was at £1.50 during the summer last year - they were £2.90 a few days ago (nearly doubled in 7 months). It just shows (in my opinion) that if you can hold your nose and buy share's in high quality, large blue chip companies when they have had a bump in the road and no one else wants them, there are large gains to be had

Two final thought's - You will get 6% divi on your investment and
How Do The Investor's that Past up Barclay's at £1.50 Feel Now?

I know it's hard to buy something everyone else is selling, but it is usually very profitable if you can!

Fabius1 08 Jan 2013 , 10:16pm

ANuvver

Oh for an edit function...

You should pay more attention. Sorry, couldn't resist it!

F1

SevenPillars 09 Jan 2013 , 10:05am

Probably a non story. Verizon might like to do this, but probably couldn't afford to do so and Vodafone has no reason to sell cheap. The market will probably revert to 4g worries again in a few weeks time. Vodafone's shares were due a bounce, the market probably needed a story to support it.

BigJC1 09 Jan 2013 , 10:50am

Jaizan:
I did research the 42 and 45 P/E's maybe I was looking at the wrong site or maybe the US sees mobile as a fast growth tech area with huge LTE/4G potential ?

Vodafones news of rapid growth in Africa seem to support this with the South African business now bigger than the UK and Spain in terms of profit (EBITDA of $1.5 billion) with earnings expanding above 50% annually in some parts of Africa. That sort of growth would appear to support a higher P/E ?

jaizan 09 Jan 2013 , 6:59pm

BIgJC1.
According to Digital Look, Vodafone EPS has gone up from 12.56 to 15.51p over 4 years.
That kind of modest growth could support the current PE ratio, but I don't think it's even close to justifying a 40+ ratio as (apparently) commanded by the US stocks.

BigJC1 10 Jan 2013 , 8:38am

Jaizan:
I agree, I think any P/E over 20 is difficult to justify and after the helter skelter of tech stocks in the dot com boom I tend to stay well clear (I was lucky at that time in getting in and out of the market quickly). The point I was trying to make was that if the higher P/E's do exist in the US then that should drive the valuation of Verizon shares rather than taking Vodafones global P/E as the author suggested.

HKman 11 Jan 2013 , 3:50am

Whatever value you place on the Verizon stake (you cannot simply calculate 80-50 due to tax) the market cap of VOD doesn't reflect by a long way the value of the asset.

Much of VOD's business is stagnant but bits are still growing and it still generates heaps of cash - so the dividend is pretty safe.

So - hold/buy the stock and collect the dividends until nature takes it course and the value of Verizon is eventually realised by VOD shareholders through a transaction of some kind.

Sometimes investing does not have to be difficult!!!



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