When I last recommended Vodafone (LSE: VOD) (NASDAQ: VOD.US) on the Motley Fool’s US sister site five years ago, I suggested that the company was safe but not particularly sexy. As it happens, today that prediction looks quite accurate: the stock is trading about 50% higher than its 2009 valuation, after factoring in the 6:11 reverse share split this January. That’s nothing spectacular, but no disaster story either.
That said, if you had bought Vodafone when I sold it on February 22 this year just prior to the sale of its 45% stake in Verizon Wireless, you would have showed gains of 110% which represented nearly a threefold return on the FTSE 100 overall.
There has been a lot of griping among shareholders of Vodafone this year, many of whom have been caught off-guard by the sudden drop in the value of the shares in the second and third quarters.Â
Adding to uncertainty, Vodafone has been voraciously snapping up competitors in European markets. In March it paid €7.2 billion for Grupo Corporativo Ono, a Spanish cable provider. Then on Friday, it said that it would take a 72.7% stake in Hellas Online for €72.7 million.
Bondholders are fretting about the rising debt incurred. At the end of March this year, Vodafone’s debt was £28.3 billion, which is 1.83 times the company’s forecast 2015 EBITDA. Moody’s has suggested more leveraging could cause the company to lose its A3 credit rating.
The World’s Biggest Telecommunications Fund
What everyone misses is that Vodafone is essentially a private-equity fund specialising in telco and data communication devices. It snaps up big holdings of complex and illiquid assets at small premiums, and uses its sprawling financial and technological infrastructure to add value to those holdings over long periods of time. Eventually, it spits those pieces out for a profit. When it does, a Verizon scenario is the rainbow that’s at the end of the horizon.
This means that shareholders want Vodafone to leverage its assets and make acquisitions at a fast clip when it’s sitting on cash, especially when they are obtained around market value in an environment where prices are rising. So for long-term holders, we shouldn’t really care about the bondholders’ concerns, nor the immediate dividend scenario (read my Foolish colleague Alan Oscroft’s excellent analysis of the company’s dividend scenario here). The big windfalls come in huge, one-time payments or smaller variants thereof. With an economic uptrend under way, there’s a higher chance this sort of activity will pick up now.
In this case more than most, timing is everything however.Â
There isn’t a lot further down to go, and when the stock rises it could do so sharply: recently, it was rumoured that Softbank or AT&T might swoop in and make a bid for the company at 300p per share. The rumours have been quietened by the announcement of the company’s Hellos stake, but that was just a tiny deal so they may well come back soon, or even materialise.