Vodafone (VOD) ADR holders have multiple actual and potential events revolving around their shares. In this article, we will explore the Verizon Wireless divestiture, the potential of a future AT&T buyout of the remainder of the company, and associated share valuation scenarios.
Verizon Wireless Sale Close
As of Friday, February 8 Vodafone, ADRs closed at approximately $36.50. This equates to a total market cap of ~$177 billion.
Between now and February 21, Vodafone expects to close out its 45% interest in Verizon Wireless via $130 billion sale to Verizon Communications (VZ). Of the proceeds, Vodafone management has stated that it will return about $84 billion to shareholders in the form of cash and Verizon stock.
ADR holders may expect to receive approximately $4.90 in cash and $12.25 in stock. This should result in Vodafone shareholders ending up with more or less a quarter of a share of VZ stock for each VOD ADR. The final calculation is contingent upon a 20-day average of Verizon closing share prices prior to settlement.
As part of the transaction, Vodafone has included a "Share Consolidation" provision, or essentially a reverse-split so that the post-divestiture share value is roughly equivalent to pre-close.
An 8% boost to the cash dividend is expected upon the proceeding dividend declaration.
Vodafone Valuation, Post-VZW Divestiture
Let's look at this two ways, first by market cap, and then by an EBITDA-multiple analysis.
Market capitalization viewpoint
Let's assume that pre-divestiture, the total market cap remains around the $177 billion mark. After the transaction, we can shave $84 billion off that figure as it will have been returned to shareholders. This leaves $93 billion remaining. If no "Share Consolidation" was enacted, and the market cap held fast, the ADRs would be worth about $19.20 each.
Vodafone's fiscal year ends in March. In the 2012/13 FY, the company (sans Verizon Wireless) generated EBITDA of about $20.2 billion. In the current fiscal year, it appears reasonable to premise that EBITDA will not increase, and indeed may decline slightly. While VOD has demonstrated good growth in Africa and Asia, persistent weakness in Europe, particularly southern Europe, has been a drag on earnings and cash. For purposes of this exercise, let's assume that Vodafone maintains $20 billion EBITDA in the current fiscal year. This would result in about EBITDA of ~$4.10 per share.
As outlined in my SA article published September 2013 entitled, "Why I'm Keeping Vodafone, Selling Issued Verizon Shares, and Substituting AT&T," I suggested a 4x Price-to-EBITDA multiple would align Vodafone with peers Verizon Communication and AT&T (T). Today, one could argue that VOD shares deserve a richer multiple given the post-divestiture company will have a stronger balance sheet, continued global growth prospects, and will have a prospective dividend increase baked in.
In addition, Vodafone plans to spend about $11 billion on Project Spring, an initiative to develop organic business within the current Group companies. Successful implementation of this project could further contribute to EBITDA-multiple expansion; it's possible Mr. Market may get out ahead of the results.
A straight 4x multiple equates to a pre-Share Consolidation ADR value of $16.50. A 4.6x EBITDA multiple results in the same valuation as indicated by the market capitalization exercise above.
Each investor must make his/her own assumptions. Other factors include GBP to USD currency fluctuation, tax considerations, and of course general stock market animal spirits.
What About an AT&T Deal? Are They Still in the Picture?
In the fourth quarter 2013, there was a flurry of chatter about AT&T Corp. buying out the Vodafone "rump" after the Verizon transaction was complete. I suspect the talk helped boost VOD ADRs to over $39 each in January.
On January 27, AT&T made a formal statement to the UK Takeover Panel that it was dropping its bid for the company.
However, reviewing the details of the statement coupled with reading the Panel rules regarding this matter, the deal isn't dead at all. It just got cooled down....a little. Effectively, the Panel rules are designed to avoid excessive speculation on takeover activity, leading to potential market instability. Remember, Vodafone is one of the very largest companies on the London bourse. Boiled down, the rules state that potential acquiring corporations must "put up or shut up." If the election is made to "shut up," then Rule 2.8 states that the suitor must stand down for 6 months.
However, there are several loopholes under Rule 2.8 "Notes" that dilute it. For instance, Note 2 says the statement may be "set aside," if the offeree corporation agrees to it, or another third party enters the fray. This could further be construed to mean AT&T could make a joint offer in conjunction with another third party tomorrow. See page 20.5.13 of Rule 2.8 for details.
So what might AT&T offer on a resurrected deal?
Prior to the AT&T statement to the Panel, a take-out figure of about $115 billion had been kicked around the media. From Reuters:
AT&T, the second-largest U.S. mobile operator, had sparked speculation it could be interested in a potentially 70 billion pound-plus ($115 billion) deal for Vodafone after its CEO said in October there was a "huge opportunity" in Europe to invest in mobile broadband.
Going through the math, $115 billion would mean about $23.70 per ADR: using today's share count. It does not consider the "Share Consolidation" clause. Assuming that current ADR holders have their count reduced by half, a full-on AT&T sale could result in a buyout price around double that; I suspect plus or minus $45 could be possible.
Exciting times for Vodafone, huh? ADR owners are encouraged to read all shareholder materials carefully, watch the news wires, and keep your guard up. The company is far from a wet dishrag in a post-VZW divestiture world. Europe will not stay down forever; it's showing signs of stabilizing. Places like India, Turkey and South Africa continue to show the promise for real growth, unlike many Western nation saturated wireless markets.
And who knows? Maybe that AT&T deal just might happen.
Disclaimer: Please do you own careful due diligence before making any investment. This article is for information only. It is not a recommendation to buy or sell any stock.