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Vodafone: Eat or Be Eaten?

Ray Le Maistre
9/2/2013
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In the UK today, soccer fans are watching the news wires closely to see which players will sign for their clubs (or leave) before the so-called "transfer deadline" at 23:00 BST Monday evening. Hundreds of millions of dollars are expected to be spent on over-valued sportsmen.

At the same time, Vodafone Group plc (NYSE: VOD) investors have also been watching the wires to see if the mobile giant's stake in Verizon Wireless is being offloaded in what would be one of the all-time corporate transfer deals of all time. No one is using the phrase "over-valued" in this case, it should be noted.

And by late afternoon UK-time, those investors were popping the champagne corks as Vodafone announced it had agreed a US$130 billion deal that would see $84 billion returned to shareholders.

Of course there are still many conditions to be met before any dal is completed, but let's assume the deal goes through in early 2014 as planned. What happens then?

Well, after passing on the rump of the proceeds to its investors, Vodafone will still have $35 billion in cash from the stake sale. Consensus suggests it will look to splash a fair bit of that on acquisitions that would firm up its backbone, metro, backhaul, and fixed/cable access network assets as well as its radio access capabilities: The company is in the process of acquiring German cable operator Kabel Deutschland for about $10 billion. (See Euronews: Vodafone Strikes €7.7B Kabel Deal.)

But it might need to have its targets lined up and be ready to shoot as soon as the Verizon Wireless stake sale closes if it's to fend off unwelcome advances. Some media reports suggest that with cash in the bank and the US stake no longer part of its corporate asset base, Vodafone might become a takeover target for either AT&T Inc. (NYSE: T) or SoftBank Corp. , both major rivals to Verizon Wireless and both of which have global aspirations.

If Vodafone is set for a few years of intense M&A activity, I hope the end result is that it remains an independent operation. The telco market is in need of some consolidation, but on a regional rather than global level. It would be better for the industry and customers (but not necessarily the banks) if Vodafone was a consolidator in Europe rather than finding itself once again part of a larger service provider with a significant stake in the US mobile market.

Europe needs the likes of Vodafone to be the leaders in creating strong regional fixed/mobile service providers -- there are only a small number of companies capable of making sense of a continent that has about 150 different mobile service providers. The market needs competition, for sure, but sometimes there can be too much.

If Vodafone becomes the target of a major takeover, that would effectively put one of the consolidators out of the action for at least a year. I hope it gets to share its Verizon bounty not just with its own investors but also those of the numerous service providers it could snap up as it builds a new empire. I'd rather see Vodafone eat than be eaten.

— Ray Le Maistre, Editor-in-Chief, Light Reading

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Ray@LR
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[email protected],
User Rank: Blogger
9/3/2013 | 4:56:16 AM
Re: What should Vodafone do?
When the valuations get low enough, maybe Google will start buying the incumbents.
macster
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macster,
User Rank: Light Bulb
9/3/2013 | 4:02:57 AM
Re: What should Vodafone do?
Hello hello,

Been ages! How are you guys and gals? Good summer?

I'd look at Vodafone's earnings (excluding Verizon), assume an earnings multiple of 10, then see what analysts have priced the rest of VOD to be. Then, benchmark VOD against others (who are similar).

Interesting times! Am very interested to see if an incumbent (in Europe or wlsewhere) gets taken over. 
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
9/2/2013 | 5:17:06 PM
Re: What should Vodafone do?
Great perspective, Ray. I understand your reasoning for wanting Vodafone to do the acquiring rather than get involved with another US service provider. I have a feeling AT&T will be quite interested though, especially after its T-Mobile bid failed while Sprint's Softbank merger was approved.
Ray@LR
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[email protected],
User Rank: Blogger
9/2/2013 | 4:01:45 PM
Re: What should Vodafone do?
As long as it avoids that black hole.... that would swallow it up even quicker. 

This VOD team seems to have a very specific gameplan though so I'm sure it has its cards lined up. Executing and warding off advances is going to be tough though.
antisceptic
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antisceptic,
User Rank: Light Beer
9/2/2013 | 2:48:19 PM
Re: What should Vodafone do?
Strong words Ray!

1) yes it should sell: no control means little influence. being the most profitable enterprise in the Vodafone portfolio doesn't vouch for its future nor for dividends, as we have seen in the past.

2) value is a matter of perception. I don't think it is undervalued. Verizon gains the equivalent of a printing press.

3) it is not clear what management wants, with a less-than-stellar performance in all of its other businesses/regions. it SHOULD however consolidate and focus on key differenciators, building on its europe-wide presence

4) I agree that it is both a great opportunity and a great challenge. by leveraging roaming for its mobile business, and Europe-wide fixed backbone, it could bring significant added value to both customers and shareholders. Or it could wander away in a strategy black hole...
Ray@LR
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[email protected],
User Rank: Blogger
9/2/2013 | 12:41:06 PM
Re: Transfer madness
maybe Arsenal has some VOD shares....
PaulERainford
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PaulERainford,
User Rank: Light Sabre
9/2/2013 | 12:40:08 PM
Transfer madness
Not only that, Arsenal have agreed a £42.4m deal for Mesut Ozil. Crazy times.
Ray@LR
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[email protected],
User Rank: Blogger
9/2/2013 | 12:29:54 PM
DEAL AGREED!!
Of course, as soon as I posted this blog, Vodafone announced that the deal had been agreed.... another, newer atricle to follow...
Ray@LR
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[email protected],
User Rank: Blogger
9/2/2013 | 12:18:17 PM
What should Vodafone do?
There are a number of key questions about the whole Vodafone/Verizon affair:

 

1) Should Vodafone sell at all?

 

2) If it does, is it seling itself short at $130 billion for its 45% stake?

 

3) Does it WANT to be taken over by another company post Verizon deal?

 

4) Whose best interests are being catered t in al of this ? (OK, actually, we know the answer to that one... and it's not the customers....)

 

If I was to bet on the outcome, I would put my koney on this whole epsiode looking like the first domino that will end up with Vodafone's demise circa 2016.
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