Back in September, Vodafone (NASDAQ: VOD ) agreed to sell its 45% stake in Verizon Wireless to majority owner Verizon Communications (NYSE: VZ ) for the astonishing amount of $130 billion. The deal has sent Vodafone soaring to a valuation of $180 billion, and in the process, reduced the dividend yield to around 4.2%.
Outside the Verizon Wireless investment, Vodafone is a large wireless provider in the major European countries of Germany, the Netherlands, U.K., Italy, and Spain along with select investments in Africa and Asia. The company has roughly 500 million wireless subscribers around the world making it one of the largest mobile carriers. With the Verizon Wireless deal heading toward completion, the market is starting to wonder if Vodafone can justify its current price.
A rebound in Europe would help justify a long-term investment into Vodafone especially considering eMarketer lists that the U.S. market has already reached a 75% market penetration rate for high-speed data customers. Vodafone lists the primary European markets of Germany, U.K., and the Netherlands only reaching a smartphone penetration level of 39%. The rest of the markets are significantly below this level. Vodafone is clearly making a move out of the mature U.S. wireless market into the still developing European markets. A economic rebound in Europe would help Vodafone immensely.
Reviewing the deal
The deal involves Verizon paying Vodafone total consideration of roughly $130 billion. The primary details include the following:
- $58.9 billion in cash
- $60.2 billion in Verizon shares
- $5.0 billion in the form of Verizon notes
- $3.5 billion in the form of Verizon's 23% minority interest in Vodafone Italy
- $2.5 billion in the assumption by Verizon of Vodafone net liabilities relating to Verizon Wireless
At the completion of the deal, Vodafone plans to directly send the Verizon shares and $23.9 billion of cash to shareholders. Those totals represent 71% of the net proceeds.
Already making investment plans
In addition to already buying cable operator Kable Deutschland in Germany, Vodafone is being linked to deals for Italy's Fastweb and Spain's Ono. The company has already made it clear that it plans to spend another $10 billion on an organic investment program called Project Spring. This plan involves principally expanding and speeding up 4G network build out in the primary European markets and infilling existing 3G coverage.
The Times of India is already claiming that Vodafone plans to spend $3 billion over the next two years to expand its presence in the rural parts of India. It isn't clear whether these expansion plans in India and purchase of cable operators in Europe are related to the cash from the Verizon Wireless deal, but it sure doesn't hurt to have a strong balance sheet.
Results not so great
When Vodafone reported results for the six months ended Sept. 30, the numbers were absolutely horrible. Organic service revenue declined by 4.9% with the major contributor being Southern Europe plunging 15.5%. Even worse, the adjusted operating profit and free cash flow numbers dropped by roughly 8%.
The company lists the environment in Europe as challenging due to intense macroeconomic, regulatory, and competitive pressures during the period. All factors that the U.S. based wireless and cable operators would've probably listed as existing a couple of years ago.
Guidance though remains intact with free cash flow expected to reach up to $7.5 billion in 2014. Based on a market value of $94 billion after the $84 billion returned to shareholders, the remaining Vodafone trades around 11 times free cash flow expectations. Not bad if one considers the weak European markets are likely closer to a bottom than a top, opposite the U.S.
Vodafone is cashing out of the U.S. wireless market with smartphone penetration close to maximum levels. The company is turning around and rewarding shareholders with distributions of Verizon shares and cash. On top of that, Vodafone continues to spend on expanding networks and working on deals for assets in weak economies in Europe and Asia.
Verizon is taking on tons of debt to finance the deal. Ultimately, the valuation of the deal to either company is hard to quantify. Vodafone is investing in the weak European markets and cashing out of the hot U.S. market. It doesn't appear wise now, but it could become one of the best scenarios where a corporation sold an investment at the peak and rolled a portion of the proceeds into deals for cheap assets.
Invest in Vodafone if you think Italy and Spain will outgrow the U.S. in the next couple of years. Vodafone might be the best way to bet on a economic rebound in Europe.
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