Vodafone (LSE:VOD) was once the most valuable company in the FTSE 100. But its current stock market valuation places it 24th in the league table of the UK’s largest listed companies. Its share price is now 54% lower than it was five years ago.
During the same period the FTSE 100 has remained unchanged.
Against a backdrop of lacklustre sales and a heavy debt burden, the company’s share price has struggled. I think this makes Vodafone a prime takeover target.
There are numerous reasons why companies are acquired.
Many have a large customer base that’s seen by rivals as a way to quickly gain market share. Others have expensive infrastructure that could be leveraged by competitors to achieve economies of scale. Some have attractive brands. Most are viewed as under-performing where an injection of capital, new management and fresh ideas can help realise their full potential.
All of these could apply to Vodafone. So, who might buy the telecoms giant?
Possible buyers
There are three existing shareholders that I think could be interested in acquiring a majority stake.
Vodafone’s largest shareholder is e&, the Middle East telecoms provider. Although e&’s revenue is a quarter of its larger rival, its pre-tax profits are only 25% lower.
It recently increased its shareholding to 14.6% and is now seeking to influence who sits on the board. It’s also keen to engage with management on a “variety of topics” including some on which e& will be seeking to exercise influence. I’m sure one of the discussion points will be how to arrest Vodafone’s declining sales revenue.
Another major shareholder — with nearly 5% — is Liberty Global that describes itself as “an active investor in cutting-edge infrastructure, content and technology ventures“. It currently owns 50% of Virgin Media O2.
A third suitor might be Atlas Investissement, which is an investment vehicle focused on the telecoms sector. Atlas now owns 2.5% of Vodafone and has interests in nine other European countries. The two parties are reported to be in talks about a possible collaboration in Italy.
A costly business
But buying Vodafone would be expensive. Its current market cap is £26bn. And it’s unlikely that a buyer would be able to pay for the deal by loading the balance sheet with debt. Vodafone had borrowings of €70bn (50% more than its annual revenue) at 31 March 2022.
To try and satisfy disgruntled shareholders, Vodafone’s directors have been looking to merge with Three. Discussions have been ongoing for several months. But a deal is likely to be challenged by the UK’s competition authorities.
Irrespective of whether the company is a takeover target, I believe there are good reasons to invest anyway.
Its shares are currently yielding nearly 8%, which is much higher than the FTSE 100 average.
And last year, Kantar declared Vodafone to be Britain’s most valuable brand.
Also, the directors are aware of the need to improve the company’s performance and changed the CEO at the end of last year.
For these reasons I believe Vodafone has long-term growth potential, which is why I recently bought shares in the company. I’m therefore going to continue enjoying the dividend and wait for the management changes to take effect. Any share price bounce as a result of a takeover approach would be a bonus.
