The Surprising Buy Case for Vodafone plc

Today I am looking at why bubbly takeover talk is likely to help drive shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US) to fresh all-time highs.

Takeover whispers ready to hit fever pitch

Shares in the mobile phone operator have shot higher in recent weeks, rising more than 17% in little over a month and topping out above 220p. The stock received a boost following news that Vodafone had finally sold its 45% holding in Verizon Wireless to Verizon Communications in September for $130bn.

During the protracted negotiations, Vodafone itself was tipped as a potential takeover target for Verizon. And takeover talk ignited once again this week as analysts at HSBC said in a note that the mobile phone leviathan could become a buyout candidate for US giant AT&T.

AT&T is an active player on the M&A scene, and the firm is in the process of purchasing Leap Wireless — operator of no-contract mobile contract specialist Cricket — for around $1.2bn, subject to a shareholder vote at Leap scheduled for later this month.

HSBC notes that although the prospect of increased competition across the Atlantic is incentivising AT&T to remain active on the acquisition path, US regulators are likely to block any attempts to make large acquisitions in the country. The telecoms giant was previously forced to abandon its pursuit of T-Mobile USA in December 2011, after the US Department of Justice Antitrust Division vowed to red-light the move.

Instead, AT&T is likely to be driven towards executing substantial acquisitions overseas, according to HSBC, and has touted Europe as a likely destination owing to the firm’s expertise in monetising data. Indeed, during the summer, Spanish telecoms behemoth Telefónica was forced to deny local media reports that AT&T had made a $93bn bid for the company, which had been thwarted by Spain’s government.

With conditions appearing perfect for a takeover move, I believe that shares in Vodafone could be set to receive a fresh boost in the near future. But even if this touted M&A action fails to materialise, in my opinion the Newbury-based firm’s solid long-term growth potential should keep stock prices ticking higher.

The firm’s 4G roll-out in the UK is making excellent progress in major cities across the UK, and promises to be a future revenue driver. Elsewhere, the firm’s September takeover of Kabel Deutschland for €7.7 billion gives it access to around 8.5m households in Europe’s largest economy, and represents an excellent entry point to the lucrative multi-services space covering the broadband, television and fixed-line and mobile telephone sectors.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended Vodafone.