Seeking Alpha
Long/short equity, deep value, special situations, growth
Profile| Send Message|
( followers)  

Vodafone (NASDAQ:VOD), the telecommunication giant, has a controlling power over the 45% stake of Verizon wireless. Wall Street knew Vodafone's real worth and has been touting the deal between Verizon Communications (NYSE:VZ), the owner of a 55% stake of Verizon wireless, and the former for quite a long time. According to the rumor, Verizon Communications is planning to buy the other 45% stake from Vodafone.

Although there is no official information about bids so far, the news is all around that Verizon Communications has appointed a panel of advisers to design the course of action necessary for moving ahead with the buyout of a 45% stake of Verizon Wireless.

A latest report from Reuters reveals that Verizon was ready to offer a 50/50 stock and cash bid and announce the offer officially if Vodafone was reluctant in discussing the buyout. The sources also revealed that the offer price could be near $100 billion. If you ask me, I would say that I don't feel it's a fair bid price for such a reputable industry player.

The Strong Connection Between Verizon Wireless and Verizon Communications

Verizon Wireless is recognized as the largest player in the wireless service industry in the United States. The organization has more than 98 million retail connections. If you analyze its growth for the last three years, you will see that the organization has been able to manage a consistent growth during this phase. In 2010, its revenue was $63.5 billion and reached $76 billion by 2012.

I would also like to point out that most of its revenue, which was $64 billion, was mainly service revenue. The equipment related revenue was a minority part, which was $12 billion. Verizon Wireless also earned an operating income worth $22 billion in the year 2012. It seems obvious that Verizon Wireless has been emerging as a vital division of Verizon Communication's overall business.

For example, out of the total revenue of Verizon Communications, which was $116 billion, 66% came from Verizon Wireless alone. If I go by the numbers, the operating income generated in the year 2012 was $13 billion for Verizon Communications; while $9.7 billion was the net income to the minority interest (Vodafone has its 45% stake in Verizon Wireless). The 45% stake of Vodafone would be near about $13.5 billion in EBITDA as the total EBITDA generated by Verizon Wireless was $30 billion in 2012.

Vodafone's Real Worth?

When we try to figure out the 45% stake that Vodafone's has in Verizon Wireless by applying 9 times EBITDA multiple, it comes out to $120 billion. If we go by the calculation of sell-side analysts, Vodafone's stake in Verizon Wireless values around $130 billion.

David Einhorn, a well-known hedge fund executive once commented that when Vodafone's market value was less than $120 billion, its 45% interest in Verizon Wireless was never considered by the market. Just because Verizon Communications stopped Verizon Wireless from paying the dividends for many years, Vodafone had to suffer.

Vodafone's overall revenue, though, is not dependent on the revenue of Verizon Wireless. The share value of Vodafone is comparable to its European peers. The takeover rumor, however, definitely has some positive effects on its shares. By the end of May, Vodafone's share value has already increased by $6 per share.

With the per share value of $31, Vodafone has a market value of $145 billion now. The market value of Vodafone is now 11 times its forward earning and 9 times EV/EBITDA. Vodafone is also known for its good dividend payout which is ~4.5%.

The Bottom Line

I think Verizon Communications as well as Vodafone seem valuable because they have shares in the growing business of Verizon Wireless. If the takeover really takes place, the market value of Vodafone and its 45% stake should be worth over $220 billion and $45 per share. If you ask me, yes, Vodafone could definitely be a great stock to buy at the current market price.

Source: Vodafone's 45% Stake In Verizon Wireless Makes It Worth $45 Per Share - A 45% Premium