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Why I believe the Vodafone share price could be a bargain after today’s news

This morning, Vodafone (LSE: VOD) announced that it is set to become Europe’s leading next generation network thanks to a possible deal with US cable giant Liberty Global.

In its most significant deal since the company’s ill-fated acquisition of Mannesmann for £122bn at the turn of the century, Vodafone is planning to fork out €19bn to buy Liberty Global’s cable networks in Germany and eastern Europe.

Even though it has been agreed in principle, the deal still has to achieve regulatory clearance, which is expected by mid-2019. However, the two parties believe gaining approval from regulators should be easy. Indeed, Mike Fries, CEO of Liberty Global, has told the press “there’s no question it clears” regulatory hurdles.

A transformational deal 

If the deal does clear, I believe it could be a transformational one for Vodafone. The company is paying a relatively attractive multiple of 11.5 times operating cash flow for the Liberty assets, in line with other deals struck on the continent.

Management estimates the cost and capital spending synergies from merging the assets could be as high as €535m per year before integration costs. It is also believed that it could see revenue synergies of as much as €1.5bn per year thanks to cross-selling opportunities across the combined customer base. And when combined, the enlarged group will be the leading next generation network owner in Europe, with 54m cable/fibre homes “on-net” and a total reach of 110m homes.

If regulators allow the company to become Europe’s most prevalent telecommunications business, I believe the Vodafone share price could be a bargain. Management expects that the deal will be accretive to free cash flow per share from the first year post-completion and double-digit accretive from the third year. This will support “Vodafone’s intention to grow its dividend per share” even though the group is taking on billions in extra debt to fund the merger.

Restructuring the business

The company is also taking other steps to streamline its international presence, including the merger of Vodafone India with rival Idea. The merger is expected to remove Vodafone India and approximately €8bn of debt from the Vodafone balance sheet when complete. 

By exiting India and refocusing its efforts on the more mature European market, I believe it will be able to leave behind the aggressive price wars that have damaged its international business, and focus on the more lucrative European market. 

In theory, this should be great news for shoulders, which is why I believe the Vodafone share price could be a bargain after today’s news. 

The shares currently support a dividend yield of 6.2%, which some analysts have speculated could be cut, but now looks as if it is safe for the time being. What’s more, the Vodafone share price seems cheap based on the cost of the Liberty deal. 

Specifically, according to my figures, the stock currently trades at a price-to-operating cash flow ratio of just under five, more than 50% below the 11.5 times it is paying for the Liberty assets.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.