Vodafone: Value Without Verizon Wireless?

| About: Vodafone Group (VOD)

Like other Vodafone (NASDAQ:VOD) shareholders, I am now left to seriously consider the following: What are the value of my shares without Verizon Wireless?

There have been news reports about a possible deal worth up to $130 billion for Vodafone's 45% stake in Verizon Wireless. After talks of a deal broke down several months ago, due to disagreements about the value of Verizon Wireless, it now seems as if Verizon (NYSE:VZ) has budged and may be willing to pay Vodafone's asking price.

Vodafone - Verizon Wireless = ?

What does Vodafone's business look like without Verizon Wireless? After Wednesday's 8% jump, Vodafone's market cap stands at $155 billion, or £100 billion using today's exchange rate. Taking Vodafone's total market cap of $155 billion and subtracting $130 billion for the perceived value of Verizon Wireless leaves the rest of Vodafone's assets assumed to be worth $25 billion, or £16.4 billion.

So, are they worth it?

The Rest of Vodafone

The data below comes from Vodafone's most recent annual report, found here.

Northern and Central Europe Southern Europe AMAP* Total
Operating Cash Flow £3.3 Billion £2.3 Billion £2.5 Billion £8.1 Billion
EBITDA £5.71 Billion £3.48 Billion £4.17 Billion £13.36 Billion
Adjusted Operating Profit £2.08 Billion £1.80 Billion £1.67 Billion £5.55 Billion

* = Africa, Middle East, Asia Pacific.

Vodafone also sports a free cash flow (FCF) of £5.6 billion, not counting the Verizon Wireless dividend. Vodafone doesn't report FCF broken down from individual operating areas. Using those numbers, let's see how some of Vodafone's financial ratios compare to Verizon's.

The numbers below come from Verizon's most recent annual report and Yahoo Finance. The table below uses a market cap of $136.84 billion for Verizon, as it closed Thursday.

Vodafone Verizon
P/EBITDA 1.23 4.21
P/FCF 2.9 8.94
P/Operating Cash Flow 2.02 4.37
P/Adj. Operating Profit 2.95


Vodafone's other assets trade at a significantly cheaper value than Verizon's. Of course, a lot could be said with regard to why this is the case. Verizon operates in a very strong area compared to some of Vodafone's operations.

Vodafone's Northern and Central European operations saw a 2.4% drop in EBITDA, and Southern Europe saw a stunning 16.4% drop. Compare this to Verizon's 5.7% rise and you can see why investors put a significant premium on Verizon. Whether or not Verizon's premium is worth it is up to Verizon investors, but as a Vodafone investor I like what I see.

The European economies seem to be stabilizing, and are showing slow but positive GDP growth for the first time in a year and a half. Struggling European assets aside, Vodafone's assets in Africa, the Middle East, and Asia-Pacific are growing very nicely. Revenues from India are up 10.7% last year, Turkey up 17.3%, and Ghana is up 24.2%. In fact, 30.1% of Vodafone's profits come from growing emerging markets.

Today, emerging markets generate more cash flow for Vodafone than Southern Europe does. Yet all Wall Street is focused on is Vodafone's struggling business in Europe. This has lead to the bulk of Vodafone's assets being traded for significantly less than they are worth.

The Dividend

The other concern I have is whether Vodafone can maintain its dividend without the payments from Verizon Wireless. Vodafone's latest annual report says that the "regular dividend is paid out of free cash flow." Last year's free cash flow was £5.6 billion, and the company paid out £4.8 billion in equity dividends. But the big question is whether it can continue.

Next fiscal year, free cash flow is estimated to be £7.0 billion, which includes a dividend paid by Verizon Wireless in June 2013. This should enable Vodafone to easily maintain its dividend for the next year. This has been supported by management, as the CEO stated back in April: "the dividend is covered without VZW."

Management's goal is to increase the dividend 7% every year, as stated in the annual report. That means Vodafone's required free cash flow to support next year's dividend would be about £5.16 billion, and fiscal-year 2015 would be about £5.52 billion. This is where I start to get concerned.

Not including the Verizon Wireless dividend in fiscal year 2014, Vodafone's free cash flow is projected to be £4.9 billion. This covers Vodafone to maintain the dividend paid in fiscal year 2013, but falls £660 million short of covering the future 7% increases in the dividend management would like to see. This means that down the road, Vodafone needs to see an increase of 12.65% in its free cash flow by fiscal year 2015 to meet management's goal of dividend raises. That means Europe really has to step up, or emerging markets need to get rolling.

Also at stake are share buybacks, which amounted to £1.5 billion last year. Vodafone's free cash flow without Verizon Wireless dividend does not support the company's dividend and share buybacks. Investors should not expect the buybacks to continue with the current dividend.


Verizon Wireless dominates the U.S. market and Vodafone would lose a very strong asset in Verizon Wireless. But the truth is that only 5% of mobile phone users are in the United States. Vodafone has been heavily committed to servicing the faster regions of growth where it already has a presence -- such as Africa, the Middle East, and Asia-Pacific -- where combined EDITDA rose 10.3% last year. $130 billion could really help Vodafone expand into regions that have the potential for much stronger and longer-term growth than the U.S.

Based on the dirt-cheap valuations of Vodafone's other operations, I am happy to trade a 45% stake of Verizon Wireless for $130 billion. Even with a potential stall in dividend growth, there is significant value in Vodafone's non-Verizon Wireless assets. Trading at 1.23x EBITDA and less than 3x free cash flow, Vodafone's assets have been too heavily discounted by investors and are significantly undervalued.

Disclosure: I am long VOD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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