After selling its share of Verizon Wireless, Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) is on the hunt for acquisitions and management has plenty of cash to splash. The company received $130bn for its share of Verizon, $84bn was returned to investors, $30bn is planned for network upgrades and including available debt the company has up to $40bn, or £25bn to spend on acquisitions.
The majority of the cash used for network upgrades will be invested within Europe. Specifically, Vodafone is upgrading its European network with 4G and LTE technology, to meet customer demands and cope with the increasing demand for mobile data.
A history of overpaying
In addition to network upgrades, Vodafone is scouring Europe for bolt-on acquisitions to boost. Vodafone has recently acquired Kabel Deutschland and is in the process of buying out Spanish cable company Ono, as part of the managements drive to diversify and expand.
Unfortunately, when it comes to acquisitions Vodafone does not have a history of success, leading some shareholders to express concern that the company could be overpaying for these acquisitions. These concerns stem from 1999 when Vodafone made a bid for German telecommunications company, Mannesmann AG, which still holds the record for the largest corporate acquisition in history.
In total, Vodafone paid $203bn for Mannesmann, 56 times earnings, a 72% premium to Mannesmann’s closing share price. Almost as soon as the deal was over it became apparent that Vodafone had grossly overpaid, and within years Vodafone has to write down the value of Mannesmann’s acquired assets by approximately $40bn.
Is Vodafone making the same mistake again?
With the Mannesmann deal etched in the minds of investors, they are right to question Vodafone’s new acquisition strategy.
However, it would seem as if Vodafone is exercising restraint this time around and the company is not paying over the odds for acquisitions.
In particular, at present the companies within the European cable sector trade at an average multiple of 9.4 times earnings before interest, tax, depreciation and amortisation, or EBITDA in City speak. Vodafone paid 11.9 times EBITDA for Kabel Deutschland last year, and Vodafone’s current offer for Spain’s Ono, values the company at 9.3 times EBITDA.
So, it would appear that as of yet, Vodafone is not throwing cash at these acquisitions. Further, Vodafone’s rival, Liberty Global, also appears to be keeping a lid on spending. Liberty only paid 11.3 times EBITDA for Dutch rival Ziggo earlier this year, cooling fears of a price war between Vodafone and Liberty.
In conclusion
Overall, it would appear that Vodafone has learnt from past mistakes and is keeping a lid on spending this time around.
