Telecoms company Vodafone (LSE: VOD) (NASDAQ: VOD.US) was a very good performer in the FTSE 100 last year. Yet early in the year many, including myself, were thinking of selling the company, not buying.
Vodafone is a prime example of a company where strategy has been crucial to the performance of the company, and its share price.
Vodafone’s strategy has been crucial
Early in the year what I saw was a company whose main business was in Europe — a Europe that was in recession after the credit crunch and then the eurozone crisis, where telecoms profits were falling, not rising.
I saw a company that was once seen as a rapidly growing technology company, but which was now turning into a slow-growth, run-of-the-mill utility.
But the company’s chief executive Vittorio Colao had other ideas. He could see that the business was substantially undervalued by the market. It had a huge stake in US telecoms company Verizon Wireless; yet the value of this stake was just not reflected in Vodafone’s share price.
He could see that many areas of the world had rapidly growing telecoms sectors, yet Vodafone was based in Europe, where the telecoms sector was moribund.
He could see that the worlds of telecoms and broadcasting were colliding, and that data, rather than voice, represented the future of the sector.
So Signor Colao promptly sold Vodafone’s stake in Wireless to Verizon Communications, immediately unlocking Vodafone’s hidden value. The share price has promptly rocketed.
He has bought Kabel Deutschland, one of the main pay-tv companies in Germany. I suspect he will buy more broadcasting assets in Europe. This has turned the firm’s European assets from slow-growth to potentially a high-growth business.
He is buying up telecoms assets in emerging markets, particularly India: countries where mobile phone spend is surging, which are on the verge of a smart phone boom. And he is investing in next generation high speed data networks. Overall, the company will invest nearly £20 billion by 2017.
The practicalities of the Verizon demerger
So the company’s transformation is progressing well. But what about the practicalities of the Verizon demerger? Well, on Monday 21 February the current company will be divided between Verizon and Vodafone, so current shareholders will own shares in both Verizon and Vodafone. The shares will commence trading the following Monday. The number of shares you hold in Vodafone will halve, but the share price will remain the same.
Should you sell your Vodafone shares before this point? I think this is a moot point, probably as dependent on whether you can cope with the intricacies of owning US shares as it is on the long-term strategy of both companies.
My own view is that, overall, Vodafone is now fairly valued. The remaining Vodafone shares have strong prospects because of the reasons I have outlined above. And your Verizon shares will be a stake in the US’s leading mobile company, so they would also be a hold.
But, thinking about it, I might just be tempted to bank a quick profit…