In its current form, Vodafone (LSE: VOD) (NASDAQ: VOD.US) is a very unlikely takeover target — but management could prepare investors for a change of ownership by stating their intention to break up the group they lead. Easy, right?
No Easy Way Out
Very bad news: there’s nothing to break up right now.
For a break-up to occur, say in 2015 or later, Vodafone needs to integrate valuable assets that currently don’t sit in its portfolio, and that would cost significantly more than their net worth in the current environment. In short, I feel that Vodafone is doomed.
Is Vodafone Cheap?
Vodafone stock closed at 195p on 17 June. It has dropped 34% this year, and 14% over the last 12 months. Not even a trader should be attracted to an opportunistic bet; value doesn’t reside in the British telecom behemoth.
Vodafone has a market cap of about £51bn, so it remains too big to be bought out but big enough to fail. Potential bidders have looked elsewhere to expand their footprints and must de-lever their balance sheets before making a move. End of the story.
Of course, if its stock plunges by another 50% — £25bn is roughly the value of Vodafone I calculated based on its assets – Vodafone will become a more appealing takeover target.
Vodafone Bulls: Come On, Vodafone Is Dirt Cheap
I can hear the bulls: Vodafone is dirt cheap, isn’t it?
Elsewhere, I have been hearing the same thing about Kodak ever since the American company got its business model completely wrong in the 90s.
Vodafone won’t go bankrupt, but it is in structural decline. Sony, Nokia and Ericsson, just to name a few, are still around but have been similarly in trouble, although Nokia, in particular, has shown a commitment to take decisive action on its assets and shareholders have been awesomely rewarded.
More Pain Ahead, But It’s Cheap
Vodafone has historically been a collection of assets that have never worked well together. Ever since I said it would take a huge leap of faith to invest in the British telecom company, Vodafone stock has lost about 5% of value. It’s down almost 10% since the day it reported dismal figures last month.
Profits are under strain, organic revenue growth is an uphill struggle and M&A risk – acquisitions are central in its strategy today – render it a very unlikely equity investment.
Strategy Will Make It Cheaper
Eager sellers know that Vodafone needs to re-build its asset base. So, every single acquisition will come at a premium. In fact, Vodafone overpaid to acquire Italy’s Cobra Automotive Technologies this week.
Cobra is a bolt-on deal with a price tag of £115m. Its offering, vehicle tracking, is appealing, isn’t it?
The first problem is that Vodafone is looking to offer enterprise solutions all under one roof in fields where competitors already have a meaningful presence. Verizon Communications bought Hughes Telematics two years ago, for instance. The telematics revolution is going global, and Europe isn’t the best place to look at.
Second, the acquired assets are unprofitable, and Cobra’s stretched capital structure is only partly to blame for the losses. Cobra has lost more than €60m in the last few years, and although its operating profitability has improved, revenues have declined since 2011. Still, Vodafone paid a massive premium to secure these assets.
Earlier this year, Vodafone splashed out €7bn-plus of shareholders’ funds to acquire Grupo Corporativo Ono in Spain. Ono sales have been flat for a decade, and the business has been volatile, reporting losses for most years. Its aggregate 10-year losses accounted for more than half a billion euros.
So, Is Vodafone Really Cheap?
Most of the slump in Vodafone stock has come this year in the wake of events that essentially didn’t play out as investors expected.
A bet on a takeover of Vodafone by AT&T was perhaps conceivable on the day Vodafone’s 45% stake in US-based Verizon Wireless was sold, but AT&T later decided to spend $50bn to secure DirecTV. Japan’s SoftBank has never been a contender, really.
A joint bid from Verizon and AT&T had been long rumoured. Goldman Sachs, as well as other brokers in the City, contributed to the surge in Vodafone stock in early February, promoting the view that the Vodafone would have been acquired. It won’t take long before they suggest it will be broken up.
