Wednesday, March 13, 2013
Vodafone: the only deal that makes sense
I read with a sort of resigned alarm that Vodafone is considering selling its stake in Verizon Wireless. This is absurd - and if it happens it will mark an important part of the British business establishment (and the entire Vodafone board) as both venal and incompetent. Vodafone is our third biggest position at Bronte: this matters to us.
Vodafone has - for the last decade or so - been a collection of modest success and abject failures - made good by one spectacular success. The spectacular success is that they own 45 percent of Verizon Wireless - the best performed wireless carrier in the US.
The failures range from grotesquely overpaying for spectrum in the tech bubble (and hence crippling the balance sheet for a decade) to incompetently stuffing up the most America-like (hence desirable) market out there (my home market of Australia).
The Australian melt-down of Vodafail has been well documented on this blog - but 18 months after the video below - and 18 months after they declared the problem fixed - Vodafone is still the butt of television jokes in Australia:
Vodafone has had some modest successes - eg Turkey - but even their home market has been so unprofitable that Vodafail has been questioned for paying no domestic corporate tax. Of course they should not pay tax if they are not required to do so - but as a shareholder I would prefer them be highly profitable and with big tax bills.
India - which should have been OK - has also been difficult for tax reasons - caused it seems in part by inept management.
There has however been one success - a marvelous success. They own - but do not control Verizon Wireless. It has been a good - no a fantastic asset - and their stake is now worth more than the entirety of Vodafone.
Pointedly this one great success is the one asset they do not manage.
This record has a consequence. Almost all long-term shareholders of Vodafone are not showing substantial gains - and selling their stake would result in only a modest capital gains tax bill - if any bill at all.
However because Verizon Wireless has been so successful selling Verizon Wireless would result in a massive tax bill.
This makes it far more tax efficient for Verizon to buy Vodafone in its entirety than to buy Verizon Wireless. Tens of billions of dollars more efficient.
Any deal where Vodafone sells its Verizon Wireless stake rather than selling itself starts with a tens-of-billions of dollars disadvantage in post-tax shareholder value. It would be insane.
The only justification for such a deal is that shareholders trust Vodafone management to be tens of billions of dollars better with the shareholder money than the shareholders would be themselves.
And sorry - Vodafone management has not earned and does not deserve that sort of trust.
Bluntly, if Vodafone management pursue any deal to resolve the Verizon Wireless issue then the entire Vodafone board should be sacked for venal and costly incompetence.
The best outcome would be the sale of the whole of Vodafone at a good price. (I would be happy with a combination of cash and Verizon stock.) The next best outcome is no deal at all. At least the good asset is well managed by Verizon.
But with the demonstrated record of failure of Vodafone over the past decade Vodafone has surrendered its right to make a deal - any deal - which leaves management to squander the proceeds from the best asset they have - the only asset they did not manage.
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