Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 phones giant Vodafone (LSE: VOD) (NASDAQ:VOD.US) — and what they mean for investors.
We’ve seen a massive change to the shape of Vodafone with the £84bn sale (£38bn of which was in cash) of the company’s stake in US firm Verizon Wireless to joint-venture partner Verizon Communications. Having swapped more than £2bn a year in dividends from Wireless for a large cash pile, what is Vodafone doing now?
A £7bn organic investment programme across two years and boosting the group’s mobile operations in lucrative emerging markets — £1.9bn on spectrum licences in India last month — are not so much a change as an acceleration of the company’s previous strategy.
The real change is coming with acquisitions; a spending spree that will dwarf organic investment, and change the shape of the company’s previous footprint in Europe.
Vodafone’s mobile businesses in Europe — particularly southern Europe — have been struggling. Rather than amputating the most sickly parts, Vodafone is using its new cash pile to make acquisitions that will enable it to put its existing services together with those of the acquired companies, and offer so-called ‘quad play’ bundles of TV, broadband, and fixed and mobile telephone to consumers.
Even before the Verizon Wireless sale, Vodafone had signalled its intentions with the £6.6bn acquisition of Kabel Deutschland, Germany’s leading cable provider. That’s been followed — last month — by the £6bn acquisition of Ono, the leading provider of broadband, premium pay-TV and fixed communications in Spain. And there will be more to come.
As every investor who’s been round the block a few times knows, oodles of cash burning a hole in a company’s pocket doesn’t always make for canny acquisitions. Indeed, big companies going on big spending sprees can often lead to a big destruction of shareholder value. Over-paying is one risk — for example, by over-estimating the synergies of the combined businesses; failure to execute the integration of the acquired businesses, or under-estimating the costs of doing so is another.
To give an idea of the extent of the scope for a slip between cup and lip on just one acquisition, we can look at the so-called ‘takeover multiple’ in the case of Ono. Vodafone is paying 10.6x Ono’s 2013 EBITDA (earnings before interest, tax, depreciation and amortisation) compared with the European cable sector at 8.5-10.7x. However, Vodafone reckons it’s actually paying a bargain 7.5x when adjusted for cost and capex synergies.
If Vodafone’s numbers are over-optimistic, as some analysts suggest, value creation may be marginal at best; and destructive at worst. In which case, Ono would become “oh no!” — and if a spate of acquisitions were made on a similarly over-optimistic basis, we’d be looking at “OH NO!”
Vodafone’s disposal of Verizon Wireless is certainly a game-changer — but whether the game will change for the better for shareholders remains to be seen. It will be some years before we know. The saving grace, perhaps, is that Vodafone is making acquisitions at a time when there’s hardly an irrational exuberance around European assets — which is a big difference from when the company did one of the worst value-destructive megadeals of all time back in 2000.