September 1, 2013 5:18 pm

Doubts over size of Vodafone windfalls

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A huge cash windfall from the sale of Vodafone’s stake in Verizon Wireless is far from certain.

As the third-largest merger and acquisition deal in history looks set for completion, some analysts are predicting a bumper payout to shareholders of up to $70bn.

But with the world’s second-largest mobile phone group contemplating further M&A, any cash payouts could be much less.

In June, Vodafone agreed a €7.7bn takeover of Kabel Deutschland, its biggest deal since acquiring its Indian operations in 2007, reflecting the belief of Vittorio Colao, the group’s chief executive, that bundled deals of internet and telecoms connections will help it win customers, buoy profit margins and increase customer loyalty.

According to people close to the Verizon sale talks, Vodafone has appetite to conduct similar deals in markets such as Spain, Italy and Holland and would have been unlikely to have engaged in talks over the sale of its 45 per cent stake in the US wireless operator without a future M&A strategy in place.

Following an agreed sale, Vodafone could make an offer for Ono, the Spanish cable operator, or Swisscom’s Fastweb in Italy, some analysts believe. Analysts at Bank of America Merrill Lynch estimate these deals would cost Vodafone about €7bn and €2bn respectively.

Having bought Cable & Wireless Worldwide in the UK in 2012, Vodafone has also been linked with Ziggo, the Dutch cable operator, which has a market capitalisation of €6bn.

An array of such deals would accelerate Vodafone’s convergence strategy. But they would still enable it to make a significant payout to shareholders and would have only minimal impact in making it less vulnerable to predators.

Most notable among these is AT&T, which has a strong interest in Vodafone’s sizeable wireless presence in Europe, according to people close to the US telecoms company. The Dallas-based company sees big potential in mobile data services such as home automation and connected car navigation and entertainment systems as 4G is rolled out across the continent.

AT&T has made it clear that it is interested in entering the European mobile market even though it views it as overregulated and recognises that there may be limited opportunities to expand penetration.

However, it has little interest in Vodafone’s expanding portfolio of fixed line and cable assets. Analysts believe these would be attractive to John Malone’s Liberty Global, which already has a substantial portfolio of European cable assets.

Yet there is one deal that would dramatically accelerate Vodafone’s convergence strategy and make it less appetising to predators: an acquisition of Liberty Global.

On the day Vodafone confirmed its talks with Verizon, shares in Liberty Global rose 3.3 per cent. Vodafone has also recently held discussions with Liberty Global about buying some of its cable assets in central Europe including UPC in Romania, the country’s second largest cable TV operator.

Liberty Global, which has net debt of about $40bn and a market capitalisation of more than $30bn, would be a digestible deal for Vodafone post a Verizon stake sale and one which would significantly decrease its appeal as a takeover target, analysts said.

People close to Liberty Global have said they are watching the Vodafone-Verizon talks with interest.

Despite this, many analysts believe Vodafone will steer clear of such big deals – although they see smaller bolt-ons such as Italy’s Fastweb as more likely.

Sticking only to smaller acquisitions would leave Vodafone free to make sizeable payouts to shareholders. Analysts at JPMorgan predict Vodafone could pay out $20bn upfront and, over time, around half of all Verizon sale proceeds to investors.

But with analysts at the New York-based bank valuing the rump of Vodafone at £62bn after a Verizon sale, the group remains vulnerable to a takeover.

Some analysts believe Vodafone will now have to establish whether it is an acquirer or a takeover target.

Robin Bienenstock, telecoms analyst at Sanford Bernstein, said: “If you are in a world where everyone decides scale matters, you must decide whether you eat or are eaten.”

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