Vodafone Group Plc Soars As Verizon Considers Options

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By

Sam Robson

Published in Company Comment on 6 March 2013

Are Vodafone Group plc (LON:VOD) and Verizon Communications set for the biggest corporate merger in history?

Shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US) leaped 6.1%, or 10.30p, to reach 178.90p in early trade this morning, following news from across the pond that Verizon Communications (NYSE: VZ.US) is mulling over its options regarding its relationship with the UK-based telecommunication group -- which could lead either to the US company buying out Vodafone's stake in Verizon Wireless, or a tie-up between the two.

Reports from Bloomberg state that representatives from the two Goliaths met as recently as December, at which the option of a full merger was discussed. With Vodafone valued at £83bn and Verizon at £90bn, a combination of the two would form history's biggest corporate merger.

However, it is believed that talks stalled mainly over leadership and the location of a new company, which means that a buyout or partial sale of Vodafone's stake in Verizon Wireless is more likely, according to sources. Additionally, a merger would bring with it outside scrutiny concerning a potential adverse impact on competition.

Verizon's interest in gaining full control of the Verizon Wireless operation is understandable, as it is its most profitable division. Vodafone's current 45% share is thought to be valued at around $115bn, which would inject a considerable cash pile into its coffers should a deal be reached. Discussions are set to resume this year.

If you already hold Vodafone shares and you're looking for a stock on a similar yield, then you may wish to read this exclusive free in-depth report. The FTSE 100 company in question offers a 5.7% income, and might be worth 850p versus around 730p currently. Just click here to download the report -- it's absolutely free.

> Sam owns shares in Vodafone. The Motley Fool has recommended shares in Vodafone.

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vinchainsaw 06 Mar 2013 , 9:52am

So if VOD's stake in Wireless is worth £76bn and its market cap is £83bn...

QuantumDealer 06 Mar 2013 , 10:05am

Point well made, Vin...I am almost surprised that the remainder of the business has any positive tangible value at all given the negative sentiment by the market on its southern European exposure etc.

Nice pop in the VOD share price though.

The one thing that doesn't surprise me is that, if reports are to be believed, the 2 boards could not come to a decision as to who would lead any combined entity - how many mega-mergers do not happen due to this point alone, I wonder!

Fittster 06 Mar 2013 , 10:09am

So what would Neil Woodford do?

QuantumDealer 06 Mar 2013 , 10:31am

Cry?!

vinchainsaw 06 Mar 2013 , 11:36am

lol Fittster. Gonna have a WWNWD bracelet made up ...

vinchainsaw 06 Mar 2013 , 11:46am

QD, Given that the "remaining" market cap is £7bn, and also given that VOD had FCF of c£6bn, this would mean it is massively undervalued.

Otyher European telcos are trading at circa 12x earnings.

So, back of a fag packet calc.

Wireless value (45%) = £76bn
Other income £6bn at 12x earnings = £50bn.

So £126bn in total, an uplift of c51% on current price?

vinchainsaw 06 Mar 2013 , 11:47am

Basically Mr. M seems to be valuing VOD's non-Verizon profits at about one times earnings?

timeandpatience 06 Mar 2013 , 12:20pm

The under-valuation of Vodafone's interest in Verizon is why David Einhorn has been so bullish on Vodafone for a long while now:

http://beta.fool.com/mthiessen/2013/02/20/vodafone-trading-below-fair-value-einhorn-thinks-s/25125/

ANuvver 06 Mar 2013 , 1:56pm

Read this story last night and felt that something didn't quite stick to the wall...

Have investors really so woefully underestimated the worth of VOD's Wireless stake? Of course Verizon resent VOD's stake and it's no secret they'd love to get their hands on it. They don't have deep enough pockets for an outright buyout, so is it really such a surprise that a merger has been discussed? Given their struggling European revenues and current FX trends, why would VOD be so keen to part with their dollar milch cow? Is this story just the latest round in the protracted strategic struggle? And if rumours of a merger are already causing VOD to rerate, based on reappraisal of one of its most valuable assets, do they actually need to go ahead with a merger at all? Furthermore, leaks of the Kabel discussions halted that deal.

VOD is Dallas for investors...

grimer 06 Mar 2013 , 4:57pm

"lol Fittster. Gonna have a WWNWD bracelet made up ..."

I'd buy one!

vinchainsaw 06 Mar 2013 , 5:26pm

The thing is, merger / no merger / buy-out whatever.
The fact remains VW is the major cashcow for both VOD and Verizon.
The only difference is that Verizon is on a PE of 15... VOD 11.

vinchainsaw 06 Mar 2013 , 5:28pm

I reckon they may end up unblundling VW... it could be worse... at least the VW divvies would go straight to shareholders.

vinchainsaw 06 Mar 2013 , 5:38pm

unbundling... my bumbling spelling...

jaizan 06 Mar 2013 , 8:58pm

Perhaps it's the valuation of the VW stake that is much too high. The last valuation I saw used some abnormally high PE ratio.

ANuvver 07 Mar 2013 , 2:43am

vin: Not sure the VW divvies would fall into shareholders' laps quite as you (and I) may wish.

The plot thickens. Some ninny on Bloomberg was describing the options action today in terms of a VZN "acquisition". VOD seems to have the whip-hand in this negotiation, and they've been staunch in weathering a sort of bullying hunger-strike tactic in the past. So they've got form.

The intriguing wrinkle is that some kind of merger might allow VOD to sidestep a whacking great tax bill. That's a mighty big "might", though.

There is the Goodfellas outcome to consider, too. "F*** you, pay me."

SevenPillars 07 Mar 2013 , 9:44am

Surely the problem is that neither side seems to like each other to the extent that one side is prepared to stand down or have a lesser role, which tends to rule out a match made in heaven. In other words, merger seems unlikely because both sides want to lead and have the ultimate power on decisions. Which leaves a full takeover, which may be too costly for either side or Verizon buying back the bit of it Vodafone owns, for which they will have to pay a hefty premium. Could happen, but we know what happens when a company overpays for something, Vodafone shareholders just better hope that it is the other side overpaying.

Sexpotty 08 Mar 2013 , 4:07pm

Looks like Mr Woodford got this one VERY wrong .

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