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Ovum view: Investors to gain more than Vodafone from Verizon sale

Ovum

On September 2, 2013, Vodafone and Verizon announced that they had reached an agreement for Vodafone to sell its 45 per cent stake in Verizon Wireless back to Verizon for $130bn. Ovum believes that the deal is good for both parties, but that the decision to return 65 per cent of the proceeds from the sale back to shareholders is short-sighted. It may make Vodafone CEO Vittorio Colao popular, but we don’t believe that he will have enough left to future proof the business.

The right deal at the right time for both parties

There is no doubt that Vodafone has negotiated a good price. Due to the deployment of LTE, the US mobile market is currently in the midst of a period of rising ARPU and revenues. However, this will not last indefinitely, with US mobile revenues expected to decline by 2018. While Verizon has had a considerable first-mover advantage with LTE, its rivals will continue to expand their coverage and price their services aggressively. As a result, if Vodafone had waited any longer, it may not have been able to negotiate such a good return on its shareholding.

The deal is important for Verizon because two-thirds of its revenues come from the wireless business. Verizon clearly sees its future profits in wireless and understandably doesn’t want to share these with Vodafone. While Verizon’s fixed-line business has reported some uplift from its FiOS service, it is not happening fast enough. Verizon has been trying to integrate its wireless business into Verizon Communications for some time, and by removing Vodafone it can speed up the integration process. While it has paid an inflated price for the shareholding, it was always going to pay over the odds in order to gain control.

Vodafone should be giving less to shareholders and investing more

Vodafone has indicated that it will return 65 per cent of the proceeds ($84bn)  to its shareholders. While we recognise that the majority of this is in Verizon shares and is difficult to convert into usable money, we believe this is short-sighted. Vodafone should have announced a debt write down as well as giving a good return to investors, but it should keep the majority for investment in its existing businesses and further acquisitions.

“Project Spring” is the name that Vodafone has given to future investment in its existing businesses. It has allocated £6bn (approximately seven per cent of the Verizon deal’s value) to Project Spring, which focuses largely on mobile network investment. This is a substantial sum but the UK business alone has already been promised £900m this year. And considering that the £6bn will have to be spread across Vodafone’s five largest European markets, it becomes clear that it won’t be enough to future proof Vodafone’s network, especially when transformation of the core network and investments in the RAN, distribution and retail channels, and fixed network activities are taken into consideration. Vodafone has the opportunity to use the proceeds from the Verizon sale to gain a significant competitive advantage by having far superior networks, and it could move to a future proof network much faster than its rivals.

M&A rumors are rife, but there is no perfect match

As soon as the Verizon deal was announced, the share prices of many of Vodafone’s supposed targets rose on the hope that it would pay an inflated price. The greatest speculation continues to be around Liberty Global, which recently acquired the UK’s Virgin Media. While Liberty would bring additional fixed and content assets in the much desired convergence space, it isn’t a perfect match given that Vodafone has an impending acquisition deal with Kabel Deutschland to consider.

SFR in France is another possible acquisition target. However, the past bad blood between Vodafone and Vivendi means that it would be likely to pay over the odds for SFR. In addition, the French mobile market is experiencing its own problems, with the impact of new entrant Free and the economic downturn resulting in declining revenues. While France is an obvious gap in Vodafone’s footprint, it is uncertain whether its shareholders will be prepared to pay an inflated price for another European operation that is experiencing revenue declines.

Other names that have been mentioned include BT and BSkyB. However, while it is clear that Vodafone wants to be more than just a mobile operator, Ovum is unsure as to whether it is prepared to pay significantly over the odds to add fixed and content assets to its portfolio. Given that it has already allocated 65 per cent of the proceeds from the sale of Verizon to shareholders and more than 7 per cent to Project Spring, this leaves less than 28 per cent (approximately $35bn) for any other activities such as acquisitions and taxes. Taxes are an important issue for Vodafone as it is coming under close scrutiny about how much tax it will pay on the Verizon deal.

Vodafone has the opportunity to future proof its business, but we don’t believe it will seize the chance

Despite Vodafone’s constant protestations over the last few years, we believe that it is still thinking like a mobile operator. In the press release about Project Spring, fixed services took a back seat to 4G and 3G RAN investment. This seems to indicate that the fixed business isn’t a major priority to Vodafone, but we believe that investing more in its fixed assets could make it an integrated player of the future.

This begs the question: where will Vodafone be in five to ten years? Ovum believes that it will be better placed than it would have been had it not sold its stake in Verizon, but that it won’t be in as strong a position as it could or should have been. We believe that the investor greed of today will cost the business of tomorrow.

 


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