Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Patience Needed on Vodafone by Arindam Nag
Summary: Barron's joins the ranks in deriding the 'activist shareholders' (Efficient Capital Structures), who last week sent a letter to Vodafone (NASDAQ:VOD) with suggestions for the telecom giant: 1) It suggests the UK mobile company issue a tracking stock that reflects its 45% stake in Verizon Wireless. Tracking stocks are normally issued only when a parent has full control of the division being tracked, but since Verizon Communications (NYSE:VZ) owns the other 55% of Verizon Wireless, a tracker would be unable to influence operations, and thus would not carry any takeover premium, keeping its share price in a narrow range. 2) It wants Vodafone to borrow more than £30B in order to buy back shares or boost dividends. Vodafone's single-A balance sheet does give it some leverage, but its investments in emerging markets like Turkey and India are capital intensive, and taking on excessive debt could cause a rating downgrade, raising its future cost of capital. Barron's says Vodafone might consider pressuring Verizon to pay a bigger dividend, but says it would be ill-advised to sell its stake due to activist pressure: "It should be able to get far more value for it in two or three years." Vodafone ADRs are up 50% in the past 12 months, suggesting 'agitating investors' should exercise patience and allow the company's strategies to pay off.
Related Links: Activist Group Wants Vodafone To Unlock As Much As $76 Billion In Shareholder Value • Vodafone's Sarin Is Losing The Plot • The Mobile Phone Megatrend: Exploring the New Frontier • Parsing Vodafone's Results
Conference call transcript: Vodafone Group FY 2006