Change of circumstances - Vodafone’s mega-deal will have rewarded contrarian investors
From time to time, in articles such as Withdrawal symptom, Tough to paint and Ringing endorsement, The Value Perspective has written – usually quite favourably – about Vodafone and the decent job management have done dismantling what, over the years, had been built up into a huge but fragmented business.
The one issue that remained outstanding – in the sense of ‘conspicuous’ as well as ‘unresolved’ – was the potential disposal of Vodafone’s 45% stake in US mobile network operator Verizon Wireless. For years, given the complexities of financing any deal and indeed the personalities involved, many commentators saw the stake as an unrealisable asset.
As it happens, the current very benign rates environment has meant that both parties were able to make something happen – with Vodafone walking away from one of the biggest deals in corporate history with $130bn (£83bn). Of that, the group will return some £54bn to its investors in a mixture of cash and Verizon shares.
That is quite a price for something that, just a couple of years back, many investors were not even factoring into their ‘sum of the parts’ calculations for Vodafone. If the company was never going to see any cash out of Verizon Wireless, they reasoned, then how could it be worth anything? Well, clearly that might be true if no cash was going to be forthcoming into perpetuity; but circumstances do change.
As a business, Vodafone has a reasonably diverse mix of assets in mature and developing markets and has never been particularly indebted, certainly when compared to many of its peers in European telecoms. So, rather than getting caught up in the continual ups and downs of the Vodafone-Verizon saga, those investors who were willing to take a contrarian, longer-term view based on the undervaluation of Vodafone’s Verizon Wireless stake have done very nicely whilst exposing there capital to a relatively low level of risk.
Not only are they now be benefiting from the return on their capital that has resulted from the sale of the Verizon stake, they have also have enjoyed the significant ordinary and special dividends that were paid out along the way – and all from a giant blue-chip business that, we cannot resist pointing out, is apparently covered in depth by dozens of City analysts.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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