VODAFONE is the world’s biggest mobile phone company, with operations in 19 countries, including Ireland. It is the No 1 player in the republic, with a near 50% market share and more than 2m customers.
The company was originally formed in 1984 as a subsidiary of Racal Electronics. About 20% of what was then known as Racal Telecom was floated on the stock market in October 1988. It became fully independent three years later when it changed its name to Vodafone. The operator entered the Irish market in 2001 with the acquisition of Eircell, the former mobile arm of Eircom. About 400,000 Irish people hold Vodafone shares as a result.
The British group was in the news earlier this month following its decision to sell its 98% interest in Vodafone Japan to SoftBank in a deal that values the division at £8.9 billion (€12.9 billion). Vodafone will receive £6.8 billion on closing the deal — £6 billion will be for shareholders.
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Pramit Ghose, head of investment strategy, Bloxham Stockbrokers
VODAFONE has at last taken a strategic step in demonstrating its changing ambitions from creating a global telecoms footprint to that of becoming a more focused regional player. The sale of its Japanese assets for £8.9 billion (€12.5 billion) represents a move from the unwieldy acquisition path to that of consolidation, vastly increasing the potential for unlocking shareholder value.
After the Japanese sale, Vodafone will return £6 billion to shareholders, worth about 10p a share, probably in the form of a special dividend.
With its exit from Japan almost complete, attention has turned to the group’s stake in Verizon Wireless in America. Following AT&T’s announced acquisition of Bell South for $67 billion (€56 billion), Verizon has indicated that it wants to buy out Vodafone’s $45 billion stake in its American mobile joint venture. This would be a welcome development for Vodafone shareholders, and potentially lucrative.
We suspect, however, that Vodafone will not sell its American assets unless operational performance deteriorates significantly or it is made an offer it simply cannot refuse.
A slimmer, more efficient Vodafone should be better positioned to focus on its European markets. Management focus will be on regaining market share and new growth strategies. The introduction of 3G has not been the beacon of revenue and earnings growth that the industry had hoped for.
Thus, Vodafone must find new paths and products through which to inject growth back into the group. Expanding its central and eastern European operations with bolt-on acquisitions should reduce the chances of value-destructive deals, although there remains a possibility of one last mega-bid for France’s Vivendi Universal.
After announcing the sale of the Japanese assets, Vodafone’s share price rose from a recent low of 109p to above 130p. In spite of this strong run-up in the share price, Vodafone currently sits on a price/earnings ratio of 12.5 times 2006 earnings, an entry valuation that remains relatively modest compared with its growth rate, a £5 billion share buyback programme, the potential for an asset sale in America and its enhanced dividend yield.
Judgment: long-term buy
Pascal Conroy, senior portfolio manager, Merrion Stockbrokers
VODAFONE has been in a state of flux recently, forcing chief executive Arun Sarin to re-evaluate the strategies and ambitions of the world’s No 1 mobile operator.
A shake-up of the company is long overdue and the withdrawal from the Japanese market could signal a change of strategy, which might see further extraction of value from the company’s portfolio of assets. Longer-term, however, tougher challenges lie ahead as it must figure out a way of maintaining growth in an increasingly mature industry with intensifying competition.
With a new chairman joining shortly to replace Lord McLaurin and the recent departure of key figures identified with the previous regime, Sarin now has an opportunity to outline a new strategy that could involve a pan-European concentration with some added emerging markets exposure.
The need for change is evident as margins fall and revenue guidance is reduced. 3G services have had a disappointing uptake and new technologies such as VoIP (Voice over internet protocol) threaten its business. While mobile usage continues to rise, the average revenue per user is falling as competition increases from low-cost providers and cuts to termination rates are required by regulators. The recent £28 billion (€40 billion) asset write-down was recognition of a less promising medium-term growth outlook.
Selling the underperforming Japanese division for $15 billion (€12.5 billion) will allow 10p per share to be returned to shareholders. Another asset that could be sold is the 45% shareholding in Verizon Wireless, its joint venture in America.
Increasing consolidation in America has meant that Vodafone’s partner would pay more than $40 billion for the stake. A knockout offer in the region of $50 billion would mean Vodafone could distribute a further 30p a share to investors.
While the stock trades at a 10% discount to mobile peers, next year’s earnings multiple of 12 times does not look compellingly cheap for a company under margin pressure and struggling to grow earnings above mid-single-digit levels. Nevertheless speculation over the possible sale of the stake in Verizon Wireless should support the share price.
Judgment: hold
THE FIRM AT A GLANCE
Share price: 125.5p (181.7c)
Market cap: £67.1bn
Year end: Mar 06
EPS forecast: 12.01p
Dividend forecast: 4.84p
Leading shareholders: Capital Group 7.9%, Fidelity Management and Research, Legal and General Investment Management 3.7%, Barclays 3.6%
