Is Vodafone Group Worth 160 Pence or 240 Pence?

LONDON -- Though down from yesterday's five-year high, Vodafone  (LSE: VOD  ) (NASDAQ: VOD  ) shares are still buoyed by takeover speculation despite denials by Verizon Communications.

The rumor reported by the Financial Times' Alphaville blog put the bid price at 240 pence, a 40% premium to Vodafone's recent price. Yet the shares were just at 160 pence in February, when the FTSE 100 had already banked most of this year's gains.

How much of Vodafone's share price is based on bid speculation, and what's it really worth?

No full bid soon
Verizon has scotched any immediate prospects of a full bid. By stating it "did not currently have any intention to merge with or make an offer for Vodafone, whether alone or in conjunction with others," it's ruled such a deal out of play for at least six months.

But the FT's blog looked authoritative. It made repeated references to "usually reliable people" as its source, and taunted the newly created Financial Conduct Authority to force a statement from the companies. There is more cause for the FCA to investigate those usually reliable people: it creates a false market if some investors are privy to information others are not.

Logic
The rumored deal has logic. It envisages Verizon and rival AT&T joining forces to carve up Vodafone, with Verizon taking Vodafone's 45% share in Verizon Wireless and AT&T the rest, so:

  • Verizon gets what it covets;
  • AT&T gets a network in Europe, which it wants;
  • Vodafone shareholders receive full value for the Verizon Wireless stake without a big tax bill;
  • and the premium is big enough to force the deal over management's heads.

But it would be the biggest M&A deal ever. Financing it would be challenging and Vodafone's management would fight. Merger talks between Verizon and Vodafone broke down last year over disagreements on leadership and location.

Vodafone's weakness
Vodafone has two good businesses that are growing -- its Verizon Wireless stake and emerging markets -- and one poor one, Europe. Like-for-like revenues fell in Northern and Southern Europe last year, and Vodafone's lack of a fixed-line infrastructure is a weakness, as it can't sell fully bundled services.

With no control over Verizon Wireless, Vodafone's strength is also a weakness. If things turned nasty, we could see a return to Verizon Wireless's "dividend strike." With cash flow choked off, Vodafone's own dividend -- which underpins its attraction -- would be compromised.

The strength of Verizon's hand means Vodafone shareholders are unlikely to see the equivalent of a 240 pence valuation. That would be the top-dollar solution. Indeed, the three-way breakup talk might be a tactic to unsettle Vodafone's management.

But it would be an embarrassing failure for Verizon's CEO Lowell McAdam if he didn't seal a deal this year. With estimates for Vodafone's share of the joint venture in the ballpark of its own market cap, Vodafone could get a price that is well above its recent 160 pence, even after a $10 billion to $20 billion tax bill.

Juicy yield
So I'm happy to hold Vodafone at around 190 pence, enjoying the juicy yield and in the expectation that there will be further upside this year. But I wouldn't buy at this level in the hope of a quick gain, and I wouldn't be surprised to see the shares fall back as bid rumors go quiet.

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