Vodafone Dismantles Its Empire

| About: Vodafone Group (VOD)
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By Tony D’Altorio

Just over a year ago, disgruntled shareholders were on the march at the global mobile telecom giant, Vodafone Group (Nasdaq: VOD).

They were displeased at the underperformance of the company, which had built a global telecom empire under its previous CEO, Arun Sarin. However, the empire building had only brought together a collection of poorly performing assets that were saddled with too much debt.

The company’s current CEO, Vittorio Colao, listened to his shareholders. Stockholders wanted a slimmed-down company with a greater focus on its operations. So Colao has been slowly dismantling the empire that Mr. Sarin built over the last few years…

Vodafone Grows by Shrinking

Colao took a huge step in that dismantling last week when Vodafone sold its 44 percent stake in the French mobile phone company SFR to Vivendi S.A. (VIVHY.PK) for $11.4 billion. Vivendi already owned the other 56 percent of the business.

The $11.4-billion price that Vodafone secured for SFR is well above the $9.7 billion that was reported to be the maximum that Vivendi would pay.

The deal valued SFR at more than 6.5 times last year’s EBITDA earnings. This is a tremendous price, since most mature telecom companies trade at only about 5.5 times EBITDA earnings. Analysts at Citigroup were even more positive about the deal, saying that Vodafone sold at a 24 percent premium to the sector in general.

The SFR deal will allow Vodafone to further pay down its debt, which is a true rarity.

The deal follows the disposals of a $5-billion stake in Japan’s Softbank (SFTBF.PK) and a nearly $7-billion holding in China Mobile Limited (NYSE: CHL). This comes to net proceeds of approximately $18 billion, when a recent $5-billion investment into India’s Vodafone-Essar mobile phone business is taken into account.

There are more disposals to come from Colao as well. The company’s 24 percent stake in Polish operator Polkomtel is already on the selling block.

Vodafone’s Problem with Verizon

The recent transaction activity only leaves Vodafone with one remaining uncertainty moving forward… its 45 percent holding in Verizon Wireless.

While the remaining 55 percent is owned by Verizon Communications (NYSE: VZ), the two companies have never gotten along…

The relationship has only worsened since majority shareholder Verizon refused to pay a dividend out of Verizon Wireless’ cash flow to Vodafone in 2006, citing the need to pay down debt. The real reason, however, was an attempt to force Vodafone out at a cheap price.

Nonetheless, Vodafone has remained patient. The company didn’t panic or submit to Verizon’s demands. They were also smart enough to avoid a merger with Verizon. Such patience may soon be rewarded. Its investment in Verizon Wireless should start returning cash next year. Verizon Wireless is beginning to generate so much cash that, as Verizon’s CEO Ivan Seidenberg said in December, “You can’t spend it all.”

Vodafone’s Emerging Future Growth

A dividend from Verizon Wireless will just add to cash that Vodafone has been accumulating. This has begun to heighten speculation about Vodafone’s future and what potential acquisitions it may make.

Most likely its future growth lies in emerging markets. Vodafone already has a presence in Africa through operations in Ghana and Egypt and a 65 percent stake in South Africa’s Vodacom, which has more than 40 million customers.

And as mentioned earlier, it has a presence in India through its now 100 percent stake in Vodafone-Essar. This business has been performing well. James Britton of Nomura said, “Investors haven’t yet cottoned on to how good the underlying market [in India] has become.”

Of course, some of that money will flow back to stockholders in the form of increased dividends. And much of that will be due to its U.S. joint venture.

A resumption of Verizon Wireless dividends in 2012 could drive a 70 percent increase in Vodafone’s cash flow over the following three years. This in turn could lead to a big hike in the company’s dividend. The stock already yields a juicy 4.5 percent, so a higher dividend could make Vodafone even more enticing for income-oriented investors. The shares should continue to appeal to value investors, too. The company still exhibits some growth while having a price/earnings ratio of only 8.3.

Vodafone’s stock has risen more than 60 percent over the past two years. Based on Colao’s continuing strategy, Vodafone seems to be in good hands, and is a company that investors should get to know well in their research.

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