Vodafone CEO’s $22.8 Billion Asset Sales Show Patience Pays
April 05, 2011, 12:03 PM EDTBy Jonathan Browning
(Updates with closing share price in sixth paragraph.)
April 5 (Bloomberg) -- Vodafone Group Plc Chief Executive Officer Vittorio Colao was under shareholder pressure to sell assets when he took over after his predecessors’ decade-long takeover binge. This week, he showed that his patience paid off.
Vodafone agreed to dispose of its 44 percent stake in French wireless operator SFR to Vivendi SA for 7.95 billion euros ($11.3 billion), topping average valuations for phone deals. A $6.5 billion disposal of a minority holding in China Mobile Ltd. last September generated double the amount former CEO Christopher Gent invested in the company a decade earlier.
“Quite a few people demanded quick asset sales when Colao took over, but he took his time and struck some fine deals,” said Boris Boehm, who helps manage about 1.1 billion euros at Aramea Asset Management in Hamburg, including Vodafone shares. “The deals Colao has done are good examples that CEOs shouldn’t always give in to investor demands.”
Predecessor Arun Sarin pushed Vodafone into markets such as Ghana and Turkey to make up for a slowdown in Europe. As Colao, 49, unwinds some positions, Vodafone can now focus on gaining a dividend from its U.S. wireless venture and may buy out an Italian minority holding, analysts say.
Colao, who became deputy CEO in October 2006 and was promoted to the top job in July 2008, has generated 15 percent in annualized returns for Vodafone shareholders under his watch, according to Bloomberg data. That compares with a 7.1 percent increase under Sarin and a 26 percent slump under Gent, who led Vodafone through a six-year $300 billion acquisition spree.
T-Mobile USA Boost
Vodafone, the world’s largest mobile-phone operator, slipped 2.7 pence, or 1.5 percent, to 176.15 pence in London. The stock is up 6.2 percent this year, valuing the Newbury, England-based company at 91 billion pounds ($147 billion).
The sale of the SFR stake, announced on April 3, came two weeks after AT&T Inc.’s agreement to buy Deutsche Telekom AG’s T-Mobile USA unit for $39 billion, a transaction that boosted share prices of European mobile-phone companies.
Including SFR’s debt and taking into account subscriber- acquisition costs, the sale price values France’s second-largest wireless operator at 6.7 times 2010 earnings, according to Vodafone’s calculations. That compares with typical valuations of about 5.1 times to 5.3 times for mature telecommunications markets, according to Sanford C. Bernstein & Co. estimates. Vodafone’s SFR holding had a carrying value of 4.9 billion euros at the end of September 2010.
Industry Shakeup
Vodafone wouldn’t have got the same price two years ago, said Boehm, adding that the economic slump at the time lowered asset valuations. The T-Mobile USA sale, the wireless industry’s biggest deal since 2004, “really shook up the telecommunications M&A scene,” he said.
Saeed Baradar, a telecommunications sales specialist at Societe Generale in London, told clients in a note in February that Vivendi would be unlikely to pay a premium for an asset that they already control.
Shortly after taking over in 2008, Colao suggested that disposing of units outright could be difficult. In February 2009, when asked about asset sales, he said it’s “theoretical” for Vodafone to have “a bunch of people knocking at the door to ask for exactly what we have at the bottom of our list.”
At the time, Colao opted to merge Vodafone’s Australian unit with Hutchison Whampoa Ltd.’s operations in the country.
Good Timing
“His timing has been very good and it marks a change from the Vodafone of old which tended to pay top dollar for a lot of its acquisitions,” said Morten Singleton, an analyst at Investec Securities who recommends buying Vodafone shares.
Colao’s attempt to unwind some of his predecessors’ takeovers has led him to exit China Mobile and reduce its interests in Japan’s Softbank Corp. Vodafone is now pursuing a sale of its 24 percent holding in Polish operator Polkomtel SA.
The Ontario Teachers’ Pension Plan was among investors who have called on Colao to wring more value out of Vodafone’s assets. As recently as in last August, the Vodafone shareholder demanded the resignation of Chairman John Bond, citing the company’s “disastrous” acquisition record and the stock’s “substantial, persistent” discount to its asset value.
Colao then sold Vodafone’s 3.2 percent stake in state-owned China Mobile for $6.5 billion. Vodafone had bought the shares in two transactions between 2000 and 2002 for $3.25 billion.
Share Repurchase
Vodafone raised its stake in SFR, formerly known as Cegetel, to 44 percent after buying a 15 percent holding in January 2003. Vodafone had sought to gain full control in December 2002.
The sale of the SFR holding brings the total value of Vodafone’s disposals to about $22.8 billion since September. Vodafone said it will use 4 billion pounds of the net proceeds from the SFR deal to repurchase stock and the remainder to reduce its own debt.
The CEO has also said money will be spent investing on existing businesses as the company faces intensifying competition. He needs to deal with a slump in demand for services in the southern European markets. In the U.K., Vodafone is also set to spend on additional wireless frequencies in an auction next year analysts estimate could cost the country’s operators as much as 2.6 billion pounds.
Vodafone decided to exit the French market ahead of the 2012 entry of Iliad SA’s Free brand, “the impact of which nobody knows,” said Conor O’Shea, an analyst at Kepler Capital Markets in Paris.
Verizon Deal?
While selling minority assets, Colao is consolidating the company’s operations in existing markets. The company said March 31 it will acquire an additional stake in its Indian venture for $5 billion after partner Essar Group exercised an option to sell down its holding.
Vodafone is also seeking a payment from Verizon Wireless, its U.S. venture with Verizon Communications Inc. The company hasn’t received a dividend since 2005, as the U.S. operator focused on paying down debt. Verizon said in January it may pay a “fair dividend” to Vodafone, which owns 45 percent of Verizon Wireless.
Moody’s Investors Service today changed the outlook of Vodafone’s debt ratings to “positive” from “stable,” citing the SFR sale and the possibility of a Verizon Wireless dividend “over the short to medium term.” The rating agency ranks the debt Baa1, the third-lowest of 10 investment grades. Net debt at the end of 2010 was 30.3 billion pounds.
Vodafone may also buy out Verizon’s minority holding in Vodafone Italy, valued at about 4.8 billion pounds, as part of an agreement to restore the dividend, said Robin Bienenstock, an analyst at Sanford C. Bernstein in London.
Bobby Leach, a Vodafone spokesman, declined to comment.
As Colao tidies up the company’s holdings, he should refrain from making further acquisitions outside existing markets, according to Steve Malcolm, an analyst at Evolution Securities in London.
“The question will be can the company retain its discipline with less debt, decent cash flow and not buy stuff,” he said.
--With assistance from Matthew Campbell in Paris. Editors: Kenneth Wong, Simon Thiel
To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net
To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net
