Friday, 17 January 2014

Vodafone: Could the third largest FTSE stock disappear from the UK?

Vodafone, the company that bid for the first UK mobile licence in 1982, and bought Mannesmann in 2000, the then largest ever corporate merger valued at £112bn, could be bought by US or Japanese interests after it distributes the proceeds of the Verizon Wireless disposal.

Vodafone plans to distribute almost half its value via a special dividend on 24th February following the divestment of the 45% stake in Verizon Wireless, its US mobile asset. At current prices just over two thirds of the distribution will be in Verizon Communications shares with the rest in cash.

AT&T could be preparing to bid for Vodafone after the distribution (it is not possible before this due to antitrust). AT&T has made no secret of its international ambitions and has the balance sheet to support a bid, which would certainly also contain a large share component. A highly profitable US wireless market means that telecoms shares are trading at a premium to European listed companies. AT&T may choose to use its own highly rated shares as an acquisition currency.

Vodafone shareholders now have double exposure to the US wireless market, directly through Verizon shares and indirectly through AT&T, where the potential for a bid is partially baked in. We have for some time believed that this market is likely to get more competitive with the entrance of T-Mobile USA as a credible number three national operator in mid 2013. T-Mobile USA has been gaining share but so far growth rates for the incumbent players have also held up. AT&T may just be able to get a deal done before the US market turns and its deal currency is de-rated.

What will Vodafone shareholders get at current prices?
At current prices and FX rates*, a Vodafone shareholder who owns 1000 shares will receive a cash distribution of £300, and £756 in Verizon shares (25 shares). Vodafone is planning a share consolidation on the 24th February, after which investors will own 560 Vodafone new shares paying a dividend of 11p per share, which equates to a total dividend of £62 on the holding. This yields 4.6% at the current Vodafone share price.

What should shareholders buy with the proceeds?
For shareholders who don’t want to own Verizon, or in the event that Vodafone is bought, the obvious choice and the only remaining large cap listed UK telecoms share is BT Group. While this has a compelling growth story, its significant out-performance means that there may be better opportunities elsewhere. Europe offers a wide choice of M&A and restructuring stories. Netherlands incumbent KPN could benefit from de-leveraging after the sale of its German mobile asset, turnaround in its domestic business and potentially an eventual takeover by Carlos Slim’s America Movil, which walked away from a bid in October last year. Portugal Telecom (PT) could benefit from Brazilian mobile market consolidation and from a cleaner corporate structure. Telecom Italia (TI) could outperform if it sells its Brazilian mobile business (TIM Brazil) for a good price and uses the proceeds to turn around its domestic business, although risks remain high for both PT and TI.

* Vodafone share price of 240.0p, Verizon share price of $48.10, US$/GBP exchange rate of 1.643.

Nik Stanojevic CFA
Divisional Director

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