Tuesday, 3 September 2013

Vodafone: "Deal or no deal" on Verizon Wireless!

Vodafone @ 209.7p, -3.29p (-1.54%)
Verizon Communications @ $47.38, -$0.44 (-0.92%)

OK, so Vodafone have pulled off a sale of its Verizon Wireless stake at an price attractive enough to appease analysts and investors - VODAFONE TO REALISE US$130 BILLION FOR ITS 45% INTEREST IN VERIZON WIRELESS
And with a hefty amount being returned to shareholders its worth taking a view on my existing holding despite the bulk of the return being in Verizon Wireless shares.
At the current level of 209.75p, Vodafone is valued at around £101bn but the sale of the company's 45% stake in Verizon Wireless is estimated at $130bn or £84bn.
With the announcement that Vodafone is to return $84bn (£54.3bn) to shareholders, the company estimates this return at around 112p per share at the current value. 
But, this will be a split of cash and shares in Verizon Communications which will own 100% of Verizon Wireless as a result of the transaction.

At current valuations the split, $60.2bn in shares and $23.9bn in cash equates to 71.58% in shares and 28.42% cash.

So for every 112p being returned 80.17p will be rounded into shares and the remaining 31.83p will be cash.

There are wider implications which come up with any takeover (e.g. BSKYB etc. etc.), in that questions remain over Vodafone's strategy going forward without what is currently its single highest yielding asset and what that might do to Vodafone's ability to grow, and increase its dividends.
On the flip side the deal will reduce debt (supporting cashflow), and re-focus the company I guess.

Shares in Verizon Communications are currently worth $47.38 (£30.57 @ today's $1.55:£1), so divided by the 80.17p per share return means that Vodafone shareholders should receive 1 Verizon Comm. share for every 38.13 Vodafone shares that they currently own.

So a holding of 1000 Vodafone shares worth £2097, would yield £318.3 cash and 26 shares in Verizon (worth £794.82).

Verizon Communications want the cashflow and the dividend that Verizon Wireless currently provides as the largest mobile network in the US. 
The current forecast yield on Verizon Comm. is 4.4% but 15% of any payout is withheld in tax for foreign shareholders.

Vodafone also timed this announcement with an additional strategic plan of investment in Project Spring to accelerate its 4G roll-out across 90% of its 5 main European markets.

In addition, the company also announced a planned increase of 8% to its total 2014 dividend payout which is a yield of around 5.2% against the above share price.

Hmmm, lets look at that another way purely on income.
So 1000 shares in Vodafone worth £2097 (pre-sale), will yield 11p per share or £110.
An estimated 26 shares in Verizon worth around £794 will yield an estimated $2.0815 (Digitallook), less 15% is $1.769, which at todays exchange rate is £1.14 per share and £29.64 in total.

So against the pre-sale Vodafone value of £2097, the estimated income over a current 12 month period is £110 and £29.64, or £139.64 which is a yield of 6.66%.
And that doesn't include the one off cash return of £318.30 per 1000 Vodafone shares.

Of course, I've taken a little license there assuming that the dividend will be maintained and that is very much down to the management in both companies but there is every chance that it will be.
I also don't know what the net value Verizon Wireless is on Vodafone's Balance Sheet so cannot just add the 2 resulting stake values together: £2097 and £794.4 (as part of the planned capital return to shareholders).
But given the original concerns over a hefty $40bn Capital Gains liability it would seem to suggest that the balance sheet valuation is more modest than the agreed sale value.
The fact that Vodafone are: retaining some of the proceeds, gaining some assets, and paying down/transferring debt also means that there is a good chance that the share price may not reduce significantly other than to discount for sentiment over the loss of the asset and confidence in Vodafone's strategy.

As I write I am strongly considering a top up to my holding although this must be considered with a potential 6 month wait for any returns (and tying up cash) with Vodafone estimating a Q1 2014 completion, which could be 9 months if the company is referencing its own financial year which begins in April.

For shareholders there are also a number of other considerations namely: holding US shares, whether your broker will deal with them, and W8-BEN forms (Dealing in US Shares.), tax implications if your Vodafone holding is not currently in an ISA/SIPP as the return of cash may result in a capital gain rather than as a special dividend (which would come with a 10% tax credit), and any sale of the new Verizon shares may also be CGT liable.

Hopefully, my sums make sense although they are focussed on an aggregate return with an ongoing outlook. 
I would like to be able to pin down Verizon's value in Vodafone's Financials and will probably continue to dig but would expect a more informed analyst to publish it in the days ahead.

Related links:
http://www.dailymail.co.uk: Vodafone's market value soars to £104bn as it confirms £84bn mega-sale of Verizon Wireless stake
Dealing in US Shares.
Globally Diversified Technology, Growth, and Hedge portfolio!!!

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