Cash-Rich Vodafone Tries Sensible Shopping
Investors are ignoring differences between today's Vodafone and the company it was over a decade ago. The company's recent deals aren't as strategically haphazard as some investors fear.
By DIGBY LARNER April 19, 2014
British telecommunications operator Vodafone deserves more love from investors than it has been getting of late. Its shares have fallen by over 10% since January when U.S. giant AT&T quashed speculation that it might bid for the company.
At first glance, there are good reasons to be wary. Like many other telecom operators, Vodafone (ticker: VOD.United Kingdom) faces ever-tightening competition in mature European markets where an unseemly price war has forced down tariffs and profit margins.
Vodafone has chosen to battle this by making a series of acquisitions in Europe and elsewhere, armed with an impressive war chest earned from the $130 billion sale of its 45% stake in U.S. cellphone operator Verizon Wireless.
A MONTH AGO VODAFONE AGREED to pay €7.2 billion ($10 billion) for Spanish cable company Ono. That came less than nine months after it offered about the same amount, €7.7 billion, for Kabel Deutschland Holding (KD8.Germany), Germany's largest cable operator. The year before that it shelled out about $1.7 billion to acquire Cable & Wireless Worldwide in the U.K.
Investors might consider those moves to be entirely positive if it weren't for Vodafone's reputation for striking pricey and ill-considered transactions. George Godber, who manages the Miton Value Opportunities Fund for British-based money manager Miton Group, says: "In the early 2000s, Vodafone went on a monster spree and bought up all over the world. It paid with paper, didn't integrate properly, each country was run individually, and the shares underperformed for a very, very long time."
Some fear that Vodafone's latest purchases suffer from those same faults. Godber says the company paid 10.6 times earnings before interest, taxes, depreciation, and amortization for Spain's Ono. The figure for Kabel Deutschland came in at 12 times Ebitda, while Vodafone itself trades at only six times.
Godber, who sold Vodafone shares when AT&T (T) announced that it had no plans to bid for the company, says investors are ignoring some important differences between the Vodafone of today and the company as it was over a decade ago. The biggest change has been the arrival in mid-2008 of Chief Executive Vittorio Colao, who Godber describes as a "breath of fresh air."
Apart from the staggeringly good price Colao managed to squeeze from Verizon Communications (VZ) for Vodafone's Verizon Wireless stake, he has worked very hard to turn the company into a much leaner and fitter operation, pulling out of businesses it didn't control in countries such as France and Poland in Europe, and Japan and China in Asia.
Vodafone plans to invest over $30 billion to improve networks and services over the next two years, giving it the capacity to handle more data traffic.
THE MONEY IT HAS SPLURGED lately on acquisitions can also be excused once it is set into context. Telecom companies across Europe face the same market pressure as Vodafone and assets that are sold attract very keen interest. In France, media company Vivendi (VIV.France) agreed to sell its SFR cellphone business to Altice, which owns French cable company Numéricable Group (NUM.France), for €13.5 billion in cash and a possible further €750 million later. The bidding over SFR was hotly contested by local conglomerate Bouygues (EN.France), owner of French cellphone company Bouygues Telecom.
Cable company Liberty Global (LBTYA) was reported to be vying with Vodafone for Spain's Ono. The fact that the sellers know that Vodafone has a hefty cash pile may also have pushed them to demand a higher price.
Vodafone's recent deals aren't as strategically haphazard as some investors fear. Prior to the Ono acquisition, Vodafone had 30% of the Spanish market with 14 million clients but its margins were under pressure. Ono gives Vodafone a fixed-line operation that should help it offer price-efficient packages that include Internet, TV, and wireless.
Its purchase of Kabel Deutschland provides Vodafone similar benefits in Germany where it now has about 32 million cellphone clients, a further five million with broadband and 7.6 million with TV.
Outside Europe, Vodafone is also making significant inroads into the emerging markets that could pay dividends in years to come.
Earlier this month it paid around $1.5 billion to take full control of its Indian subsidiary. India brought Vodafone €4.3 billion in revenue in its latest fiscal full year. In all, burgeoning telecom markets such as India, Turkey, and South Africa are home to 70% of Vodafone's clients.
Citigroup analyst Simon Weeden recommends Vodafone as a Buy with a £2.90 ($4.87) price target. He puts the expected share price return at 30.5% and the dividend yield at 5%. Vodafone closed Thursday at £2.14 on the London Stock Exchange.
SolidEuropean stocks rose more than 1% in a holiday-shortened week. Brussels was tops.
DIGBY LARNER, who is based in Paris, is a Wall Street Journal news editor for Europe, the Middle East, and Africa. |
