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Vodafone $100 Billion Stirs Payout, Deal Dreams: Real M&A

May 20, 2013

Vodafone $100 Billion Stirs Dividend-to-Deal Dreams

The Vodafone Group Plc logo on an Apple Inc. iPhone in London. Photographer: Simon Dawson/Bloomberg

Vodafone Group Plc (VOD)’s investors have ideas for the $100 billion or more that the company stands to pocket for its stake in Verizon Wireless: first, a fat dividend -- then, deals.

Verizon Communications Inc. (VZ:US) has said it’s interested in buying out Vodafone’s 45 percent stake in their Verizon Wireless joint venture. The windfall would leave Newbury, England-based Vodafone with more cash than every other non-finance company after Apple Inc. (AAPL:US), according to data compiled by Bloomberg. With Vodafone set to report a drop in annual sales tomorrow amid heightened competition, Sanford C. Bernstein & Co. said it could put some of that money toward acquisitions to help move into new markets and revive growth.

After Vodafone lost more than half its value since Verizon Wireless began offering mobile services in 2000, shareholders such as Ignis Asset Management say Vodafone’s priority should be to return a large amount to investors. Even if Vodafone gave stockowners half of the at least $100 billion in proceeds, the carrier still will be left with $62 billion, including current cash. That would be enough firepower to buy Germany’s largest cable operator Kabel Deutschland Holding AG (KD8) and John Malone’s Liberty Global Inc., KBC Asset Management said.

“What they should do is a dramatic rethink of the business,” Robin Bienenstock, a London-based analyst for Bernstein, said in a telephone interview. “You could pick which markets are vital to you. You could consider doing more stuff in other countries. It’s clear that they need to act in a slightly more radical way.”

Right Price

Simon Gordon, a spokesman for Vodafone, and Bob Varettoni, a spokesman for Verizon, declined to comment on plans for the Verizon Wireless partnership. Gordon also declined to comment on potential acquisitions.

Verizon has said it’s ready to end its joint venture with Vodafone for the right price. Verizon has told analysts it believes $100 billion is a fair price for Vodafone’s 45 percent stake in the biggest wireless company in the U.S., people familiar with the discussions said last month. Vodafone has dismissed the offer as too low, the people said.

Talk about a deal has been heating up as Verizon’s stock increased (VZ:US), giving Verizon the financial flexibility to buy out the stake. Verizon shares reached $53.91 on April 30, the highest level in 13 years.

Vodafone Woes

Vodafone, by comparison, has seen its market value drop by more than half to about 97 billion pounds ($147 billion) since Verizon Wireless debuted in 2000, and it’s struggling now to overcome shrinking sales in Europe, its biggest market. The company will probably report its first drop in annual revenue since 2005 tomorrow, according to the average of analysts’ estimates compiled by Bloomberg. Profit before interest, taxes, depreciation and amortization is also projected to decline.

“In the short term, it’s going to be the beginning of a difficult period for Vodafone,” Leon Cappaert, a money manager at KBC in Brussels, said in a phone interview.

Today, Vodafone shares fell 0.1 percent to 197.60 pence, while Verizon fell 1.1 percent to $52.74.

By letting Verizon buy out its stake in the venture, Vodafone could collect proceeds that, if paid in cash, would leave it with more cash on hand than any other non-financial company besides Apple, according to data compiled by Bloomberg. Apple had $145 billion in cash (AAPL:US) and marketable securities as of March 30, data compiled by Bloomberg show, before announcing last month that it will return an additional $55 billion in cash to shareholders through a higher dividend and share buybacks.

Cable Appeal

While many Vodafone investors will insist that a significant chunk of that goes back to them in the form of a dividend, Goldman Sachs Group Inc.’s Tim Boddy and Heinrich Ey of Allianz Global Investors said the company also could use some of the money to purchase a cable operator and bolster its European operations.

“There are various aspects to why a deal with a cable company might make sense,” Ey, who helps manage $195 billion for Allianz in Frankfurt, including Vodafone shares, said in a phone interview. “The cable business is still a growth business, so it would add definitely to Ebitda and revenue growth, in which Vodafone is currently lagging.”

In a European wireless market that’s got the highest mobile penetration rate in the world according to the GSMA industry association, Vodafone is seeking to branch out into “converged services” -- the increasingly popular bundled packages of voice, TV and Internet -- to attract new revenue.

German Market

Buying Kabel Deutschland, the German cable operator with a market value of 6.5 billion euros ($8.3 billion), would give Vodafone the ability to offer such packages to customers in Vodafone’s biggest market, Bernstein’s Bienenstock said.

Vodafone previously abandoned plans to approach Unterfoehring, Germany-based Kabel Deutschland after the company’s intentions were reported in the press, people familiar with the matter told Bloomberg in February. Still, owning assets in Germany makes sense if Vodafone wants to pull ahead of competitors and offer unique products, analysts including Bienenstock said.

Vodafone also could buy billionaire Malone’s Liberty Global, the $18.8 billion company that’s taking over Virgin Media in the U.K. and also has telecommunications assets in Germany, Poland, Switzerland and eight other European countries as well as Latin America, said KBC’s Cappaert. The Verizon Wireless deal should produce enough cash to buy both and still have a majority left for shareholders, he said.

‘Stronger Footprint’

“They could use that cash to build a stronger footprint in Europe,” Cappaert said.

Vodafone could also seek a takeover of Jazztel Plc (JAZ), said Ey at Allianz. The provider of broadband and mobile-phone services in Spain is projected by analysts to increase revenue by 12 percent this year, according to data compiled by Bloomberg.

Today, shares of Jazztel fell 0.3 percent to 5.735 euros in Madrid trading.

Representatives from Kabel Deutschland, Liberty Global (LBTYA:US) of Englewood, Colorado, and Jazztel, which has its legal headquarters in London, declined to comment.

While cash from unwinding the Verizon Wireless stake would provide Vodafone with a nest egg for deals, there’s no guarantee a deal will happen anytime soon. Verizon has said several times in the last decade it’s interested in buying out its partner without going forward with a transaction. Even if a deal does happen, Verizon could seek to use its stock as currency rather than cash after the run-up in its shares, said Guy Peddy, an analyst at Macquarie Group Ltd. in London.

Dividend Demands

“You’d clearly prefer cash, but you’ve got to be realistic about this,” Peddy said in a phone interview. “It all depends on the valuation. The higher the valuation, the less cash funding there is available for it.”

Verizon Wireless said last week that it would pay its partners a $7 billion dividend, with Vodafone’s portion at $3.15 billion. The payments, which only restarted last year after a seven-year drought, have gotten progressively smaller as Verizon opts to use the cash to pay debts instead. Vodafone doesn’t control the management of the wireless business or when it receives payments.

Should a transaction come together, Vodafone investors expect to see most of any cash component cycled back to them. Shareholders should receive “well more than half and quite potentially a bit more” of the proceeds from any deal, said Ralph Brook-Fox, a fund manager at Ignis Asset Management, which oversees more than $100 billion in investments, including Vodafone shares.

War Chest

“There is obviously a case for some M&A to reinforce their position within Europe, but I would hope that the sums of money involved would be a fraction of what they would receive,” Brook-Fox said in a phone interview.

Still, assuming cash proceeds of $100 billion, Vodafone could give shareholders half the money and still be left with a war chest that would rank as the fourth-biggest cash hoard in the world, excluding financial firms, the data show. That’s plenty for buying companies such as cable operators that could strengthen Vodafone in Europe, KBC’s Cappaert said.

“Vodafone is not that well-positioned,” Cappaert said. “Buying European cable won’t take $100 billion.”

To contact the reporter on this story: Amy Thomson in London at athomson6@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net


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