Tuesday, March 19, 2013
Verizon-Vodafone: it is time to go hostile
The only deal that makes sense is for Verizon to buy Vodafone in its entirety.
If Vodafone will not sell there is a solution for Verizon: go hostile.
As detailed in the previous post Vodafone has been had a decade of modest successes and abject failures made good by a single amazing success. The amazing success is that they owned 45 percent of Verizon Wireless - the best performed US Wireless company.
I noted that Vodafone's great success is the only substantial asset that they do not manage.
Several UK fund managers (reasonably) pointed out that this was not entirely fair. The history is instructive. During the tech-bubble Vodafone got properly carried away. Not only did they pay up for spectrum (which may not have been a choice given WorldCom competing at auctions) but they paid top-dollar for several assets entirely by choice. The biggest mistake was that they purchased Mannesmann at the height of the bubble for $170 billion USD. This deal is second only to AOL-Time Warner as the most stupid large deal of the tech-bubble era.
Over the next couple of years the delusional bubble-era management were replaced by bland mediocrities who did not do very much wrong at the cost of not doing very much right. Vodafone had completely "rogered" its balance sheet during the bubble and as a result did not participate in the cheap spectrum auctions around the world that happened during the 2002-2007 period. Getting carried away in a bubble has permanent effects (just ask Citigroup or BofA if you need more recent examples).
My UK fund-manager contacts thought that I was being harsh on Vodafone criticizing current management for their complete lack of spark. They thought the current management were chosen to be boring and fulfilled that task admirably.
By contrast, the Baby Bells did not participate much in the madness of the tech bubble - leaving that to the CLECs (anyone remember McLeod) and Worldcom and Enron Broadband, Global Crossing and the like. The Baby Bells were boring.
As befits the end of a bubble - the meek were left standing and inherited much of the USA. The Baby Bells consolidated to form Verizon and AT&T and have solid balance sheets, good businesses and the absence of insane competition.
Their cycle was the opposite of Vodafone. They were boring when Vodafone was exciting and they are now strong when Vodafone is weak.
In any deal Verizon deals from that strength - strength created more than a decade ago.
Sir Brian Pitman once told me that the only real bids are hostile bids. He had a sort of logic: in a negotiated bid it is highly unlikely the acquirer is getting an outright bargain. Negotiated bids happen with a willing seller.
Hostile bids however change the world. The stock market is full of incorrectly valued securities. It is fairly common for stocks to lose 70 percent of their value or triple. As a corollary the stock market is full of securities trading at a third of fair value and three times fair value.
If we could pick which were which we would all be rich. Alas it is very hard to pick what is cheap and what is expensive - and the investing world is full of "if-only" statements. [If only I had purchased Citigroup below a dollar...]
Hostile bids are typically done without due diligence - and the range of outcomes is large. In a hostile bid you might pick up an asset for a third of fair value or three times fair value. These extreme outcomes don't happen so much in negotiated bids.
The result: hostile bids change the world. Extreme variation makes hostile bids either extremely good or extremely bad.
This bid does not require much due diligence
Hostile bids can be extremely good or extremely bad because you can't do due diligence.
However in this case if Verizon were to bid for Vodafone Verizon would know what they are getting. The WSJ story linked above suggests that the Verizon Wireless stake is worth between $106 and $137 billion. I have a slightly higher number.
The total market cap of Vodafone is $137 billion.
Vodafone is trading below what I think the stake in Verizon Wireless is worth.
Verizon can bid fair value for what the Wireless stake is worth and get the rest for free - and it is obviously worth more than nothing. Even the Australian asset has some value!
And Verizon obviously do not need to do due diligence on Verizon Wireless.
In other words Verizon can have all the pluses and very few of the negatives of a hostile bid.
A hostile bid is possible of course because the UK fund managers have little faith in the mediocrities that now run Vodafone. Vodafone is cheap because of management.
I know if there is an American bid for this UK champion there would be all sorts of nationalistic squeals in the UK. But the UK fund management community would donkey-like eventually just accept the bid. For Vodafone that is the cost of a decade of failures.
And the meek (the Baby Bells) would in fact inherit the earth.
The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.