Here’s why I think the Vodafone share price should be 110% higher

Reflecting on speculation, our writer believes there’s a case to be made for the Vodafone share price being more than twice what it is today.

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Image source: Vodafone Group plc

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The Vodafone (LSE:VOD) share price has rallied in recent days due to rumours that the telecoms giant could be a potential takeover target.

The source of the speculation appears to be Betaville, a self-styled “cheeky website”, that says it’s heard reports a European company is considering making an offer.

I have no idea whether there’s any substance behind this story. But a potential bid price of 100p-105p has apparently been mentioned. If correct, that’s a 42%-49% premium to the closing share price on 1 March 2024, valuing Vodafone at up to £27.9bn.

However, I believe there’s some compelling evidence to suggest that this is seriously undervaluing the company, potentially by up to 110%.

Forecast earnings

Vodafone’s preferred measure of profitability is EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases).

Analysts are expecting this to be €13bn (£11.1bn) for the year ended 31 March (FY24). An offer price of 105p would value the company at 2.5 times EBITDAaL.

I think this is cheap because of recent deals that Vodafone has either completed or is about to conclude.

Real deals

In January 2023, it sold its business in Hungary for €1.6m. The selling price was equal to 8 times earnings for the division.

Eight months later, it announced plans to dispose of its operations in Spain for total consideration of €5bn, including cash of €4.1bn. The company said this was 5.3 times’ its FY23 EBITDAaL in the country.

And last month, it disclosed it was in negotiations to sell its business in Italy for €8bn — 7.6 times the unit’s FY24 forecast earnings.

The group’s expected profit for FY24 includes a full-year’s contribution from Italy and Spain. These two regions have a combined profit of approximately £2bn. I’m therefore going to assume Vodafone’s EBITDAaL will be €11bn (£9.4bn), once these businesses have been sold.

In these circumstances, a bid price of 105p would value the company at just under three times earnings.

That’s still a long way short of the multiple of 5.3 that Vodafone has agreed for Spain. Applying this to the group would imply a valuation of £49.8bn, or 187p a share.

The sum of the parts is greater than the whole

But there’s a difference between buying a part of Vodafone – for example, one of its divisions – and the entire company.

A potential suitor would have to acquire the company’s debt along with all its assets and other liabilities. That’s why the enterprise value (EV) — market cap + net debt — is often quoted when it comes to acquisitions.

At 30 September 2023, Vodafone’s net debt was €36.2bn. Assuming the cash proceeds from Spain and Italy are used to reduce its borrowings, this could fall to €24.1bn (£20.7bn). Adding this to its current market cap of £18.7bn, gives an EV of £39.4bn, or 148p a share.

That’s why I think the company’s worth 110% more than its current share price implies.

But as John Naisbitt, the American author, once said: “Value is what people are willing to pay for it”.

If the rumours are true then it’s clear that potential buyers of Vodafone don’t value the company as highly as I do. However, there’s no obligation on shareholders to accept a bid that they consider to be derisory.

I’m a shareholder and that’s why I’d reject an offer of 105p.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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