TSB Banking Group (LSE: TSB) and Banco Sabadell have extended the timetable on the latter’s bid for the UK bank, it emerged on Friday. Analysts who talked up political risk at the time rumours first sprang to life in March were deeply disappointed, I gathered.
TSB stock was slightly weaker in early trade last Friday, but the news passed almost unnoticed since the deal appears to be on track and should close pretty soon: TSB’s market price is in line with the take-out price of 340p a share, so there’s little to worry about for TSB investors.
Wave goodbye to British ownership.
Meanwhile, Vodafone (LSE: VOD) shareholders have enjoyed one of the company’s best spells in a very long time, spurred by takeover talk that could become reality any day now: investors are adamant Vodafone will engineer a break-up to facilitate a win-win combination with Liberty Global.
My inbox has been bombarded by bear/base/bull-base scenarios from analysts, but I would not bet a penny on such an outcome, bullish comments from both companies’ executives notwithstanding. Vodafone is worth less than 200p a share, based on fundamentals and dividend risk, in my view, and has become one of the riskiest stocks in the FTSE 100.
It’s as simple as that, whether you like it or not.
Lucky Days… For Some
A change of ownership seems to be the inevitable outcome for TSB, so this is a done deal, one backed by regulatory clearance from the European Union. You will unlikely get anything more than 340p a share, as rival bids would have already emerged by now.
If you are a big fan of TSB and you are keen to participate in any additional upside, you could buy a poorly diversified bank such as Sabadell — but then, consider that you’d take meaningful currency risk while investing in a stock that has already doubled in value in the last couple of years.
Moving to a more serious matter, you’d do well to pocket a nice capital gain on Vodafone following its recent rally. Its stock is up 13% since it reported a poor trading update in May, which actually did not contain any meaningful data — and also pointed to a balance sheet that is much weaker than it should be for a company whose core growth rate is in the region of 0%.
Moreover, talk such as the possible monetisation of mobile data usage — which is core in its £19bn Project Spring investment plan — is premature, I’d argue.
This Is What You Are Invested In
It has been a mating game between Vodafone and Liberty ever since Vodafone decided to sell its US ‘Wireless’ joint-venture stake to Verizon at the end of 2013. Between September 2013 and March 2014, Vodafone rose to about 250p from 195p as most investors expected a blown-out offer from virtually any big telecom player around the world.
Sadly, its competitors looked elsewhere for value, and VOD stock plunged to about 190p a share — but once again, around the end of 2014, takeover talk came back with a vengeance, and at that time Vodafone, admittedly, gave some signs of a quicker recovery. It continued to accumulate fixed assets, which were acquired at high multiples in the meantime, though.
Everybody now knows that there are strategic merits in a Vodafone/Liberty tie-up, but investors have little understanding with regard to how such a deal could ultimately be structured. In fact, not all analysts agree on the multiples to apply to Vodafone’s parts, on the resulting costs and revenues synergies, and the resulting asset base of the combined entity.
This is because in M&A all these calculations are “pro-forma”, and could well be entirely wrong. It’s a nice academic exercise that combines knowledge, art and expertise, but nobody can firmly asses what the future may bring. I am also concerned about the lack of alternatives, should Liberty’s boss make up his mind — it’s in Liberty’s interest to talk openly about deal-making, since its fundamentals are even weaker than Vodafone’s.
From the US (AT&T) to Japan (Softbank), most of Vodafone’s suitors are kept busy with the integration of other assets, so alternative options are thin on the ground — well, the more I look at the possible tie-up with Liberty, the more the £112bn Mannessman deal of 2000 springs to mind.
As you might know, that was a horror show.
It’s not usual: cross-border deals are incredibly difficult to pull off, history has shown time and again over the last 80 years or so.
The last time I covered the Vodafone/Liberty saga in September 2014, Vodafone traded at 203p, or about 50p below its current level — which is exactly where the stock should change hands right now. Ever since, Vodafone has met market estimates, providing little reason to be cheerful about its grow prospects (muted), core cash flow (underwhelming) and net debt pile (rising), however.
The new story investors are happy to bet on is a break-up of Vodafone’s emerging market operations, and a combination with Liberty — and I have to say, in a very unusual fashion for me, the market seems to be wrong about both stocks, which look grossly mis-priced.
