A few weeks ago I said that Vodafone (LSE: VOD) (NASDAQ: VOD.US) might be a buy, based on its strategy of expanding into pay TV and broadband, growing emerging markets, investing in its data offer and (most importantly) selling its stake in US mobile company Verizon Wireless.
Well, last week Vodafone really did sell its stake in Verizon Wireless. Verizon bought out Vodafone’s stake for $130bn in cash and shares. The share price rapidly rose by 10%.
A buy or a sell?
After this sale there has been a vigorous debate about what this means for Vodafone’s shares. Some people have said this makes Vodafone a sell. Some have argued that Vodafone is now a buy. Well, here is my view.
Vodafone’s difficulty is recent years has been its heavy reliance on European markets. It has been these markets that have suffered during the eurozone debt crisis, which has wracked the continent in the past few years.
Because of this, Vodafone has found it difficult to grow, as European consumers have reined back on their spending. This is why analysts have, until now, predicted no growth in profits in the next few years. This is also why, a year ago, I was so sceptical about the company’s prospects. I feared that the company, after so much success in its early years, was in the autumn of its days.
From autumn to spring
But I think I underestimated the company’s chief executive, Vittorio Colao. Señor Colao cut his teeth in the worlds of banking and consultancy, rather than telecoms. So he knows a thing or two about strategy and realising value. And he has quickly realised that Vodafone’s main difficulty has been seeking out growth. It is no coincidence that Vodafone’s latest strategy is called Project Spring.
And the sale of the Verizon stake is the crux of this strategy. Make no mistake, the Verizon deal will transform Vodafone’s prospects.
Colao has called this the third part of Vodafone’s development. The first part was Vodafone’s birth and growth as a mobile telecoms company. The second part was the record-breaking takeover of Mannesmann during the tech boom, and the subsequent maturing as a global telecoms provider.
The third part is the sale of the Verizon stake and what I expect to be the building of a global portfolio of pay-TV, broadband, fixed-line telecoms and mobile telecoms interests stretching from Europe to Asia, Africa and Latin America.
Reinvented as a company of the future
If Señor Colao really has strategic nous, then his acquisitions will focus on data services, by investing heavily in 4G networks. He will reduce his reliance on European mobile telecoms. But one area where there is real scope for growth in Europe is pay TV. The company has signalled its intent by outbidding rivals for Germany’s Kabel Deutschland. I expect the company to assemble a range of services in pay TV, broadband and fixed-line telecoms.
And he will also invest in telecoms in emerging and frontier markets. In countries such as India, people are yet to discover high-speed mobile networks and smartphones. When they wake up to this technology, there will be a boom in data services — I expect Vodafone to invest heavily in this.
So, in summary, there are several reasons why Vodafone is now a buy. Firstly, and I think this has been glossed over up to now, the value of its stake in Verizon has been fully realised, immediately adding value to the Vodafone share price. Secondly, Vodafone has an opportunity to reinvent itself as a global provider of pay-TV, broadband and fixed-line and mobile telecoms. Thirdly, you will also gain a stake in the US’s leading mobile telecoms company. And fourthly, Vodafone is now a potential takeover target.
Because of all these reasons, Vodafone is a buy.
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> Prabhat owns shares in Vodafone. The Motley Fool has recommended shares in Vodafone.