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.

Background

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.




John

15 comments:

Anonymous said...

having bought VOD at sub 150, and happily sold my stake few days back (collecting the special div and the rest in meanwhile), I'm happy.
That said, I agree that VOD management is useless, and if I believed Verizon will buy VODa I'd stick with the shares.

As a matter of fact, I might just buy Verizon outright as a replacement if the buyout news pushes it low enough.

Anonymous said...

Vittorio Colao does not inspire confidence, that is for sure. I suspect Vodafone is going to sell its Verizon Wireless stake to Verizon and then buy a bunch of cable assets in Europe at inflated prices. Will be a great value donor to a lot of people but feel sorry for you as a Vodafone shareholder.

Anonymous said...

One of the biggest mistakes of the global hedge fund industry in the last decade is not making more spoof pop videos.

Hopefully here you have started to put that wrong right.

Well done

Anonymous said...

Tax is a huge issue which means that a sale of VZW by VOD does not make any sense, and is not on VOD's agenda - just a VZ fantasy. The multi-tens of billion tax hit of a straight VZW sale by VOD comes in three ways: 1) sale of a low tax basis asset formed from multiple demergers, which cannot be avoided by a C Reorganisation as the low basis simply moves to the VZ shares, 2) Vodafone's huge Luxembourg tax asset would be impaired, 3) There are other multi-jurisdictional issues which are the result of the holding structure (e.g. EU assets held via the US).

The only way to solve this is a top-co merger. Everything you read from VZ or leaked to the press (whether deal terms, Kabel Deutschland rumours or whatever) should be seen in the context of it being a public negotiation. The relative share prices of VZ and VOD are hugely important - there are 10s of billions of dollars of value at stake on either side.

VZ needs 100% of Wireless which is printing fabulous results while its Wireline business is in the dumps. If it does not get this full ownership, it will be leaking ~$8bn p.a. in post tax minority divis to afford its own shareholder dividend. Current credit and equity markets allow it to plug that leak cheaply...and VZ must take advantage of that opportunity.

So the merger seems likely and a VOD sale of VZW with big proceeds to use for M&A highly unlikely...i.e. John don't worry too much.

Harvey Sax said...

I completely agree with you on VOD selling itself to Verizon It would be a surprise though as everyone including me has low expecations. None the less I am long VOD because I wanted to buy VZ at a discount. Shame on me.

Harvey Sax said...

I agree. But apparently the market is convinced that the VOD CEO is a self promoting perpetuating moron. I wanted to own VZ at a discount so I bought VOD. Shame on me.

Anonymous said...

John, your last 2 posts aren't showing up in Google Reader. Is there an issue with the RSS feed on your end?

Anonymous said...

Either you're not well informed or simply choose to deceive. The current CEO Colao is not the person who built VOD into this misfiring machine. He is the one fixing it. He has done a ton already like selling lots of the bits and pieces that made no sense. He's paid most of that to shareholders. VZW is a great business. But I'll take 8x ebitda for it thanks. All things are flying for VZW. Your silly commentary shows that all things are the exact opposite for VOD's 100% owned businesses. I like buying cheap and selling what is expensive. YOU?

Nick said...

I am hoping that the lack of Google reader feed is a passive-aggressive response to Google shutting it down shortly.

Although at least I will be forced into a much needed feed cull.

On topic - VOD would be mad to sell VZW - it's the only thing worth anything in their portfolio. Plus they really don't need that much cash YET.

The tax issues are also rightly pointed out as HUGE.
I strongly suspect the muppet SOTPs that are out there happily ignore the tax issue for now. Much harder to do when the investment is crystalised as cash.

Anonymous said...

The best outcome for vod shareholders would be for Vodaphone to buy out Verizone, keep 100% of VW & sell off the rest of the Verizone junk, but with this inept BOD, it's just not going to happen!

Alan Richards said...

Have they forgotten their heritage? Sir Ernest Harrison of Racal was a master of the value generating tax free demerger - Chubb and Vodafone spring to mind. Maybe I'm wrong but I thought there was a substantial shareholder exemption in the UK for gains on disposals in corporate reorganisations.

David said...

I am on the same lines as Harvey. I was looking to get in on VZW at a discount. Shows what I know. I love that video though. Great content.

Thanks,
David

Anonymous said...

So, uh, John, I'm guessing you may not be very happy right now (if you're still long), with the news over the last few days re VOD and VZ agreeing to terms on Verizon Wireless.

Happy trading.

Shane said...

Is the tax rate a surprise to you?

shane121

Anonymous said...

How to avoid UK CGT tax on share pay-out’s such as the forthcoming £84bn Vodafone Windfall?
There has been much press talk about the forthcoming Vodafone share bonanza following the £84bn sales of its stake in US Mobile Phone Giant – Verizon Wireless – especially given the whopping tax bill that this FREEBIE WINDFALL will present to some of the army of 500,000 or so UK private Vodafone Shareholders.
There is an obvious TAX FREE solution! Clearly any UK shareholder, including myself, that has already utilised their CGT allowances, would do well to “roll-over” their capital gain by investing into an Enterprise Investment Scheme (EIS) start-up, whereby, they will be eligible for not only a 30% tax refund (applicable to the previous or current tax year – you choose) but also a further CGT deferral of 28% (and IHT deferral if you have that tax position also) – the CGT deferral can be applied to any of the last 3 tax years – but for Vodafone shareholders it will be the 2013/2014 year that is hurting them most. One such EIS investment that, in my view, is gearing up to be a potential winner is www.africanewenergies.com (part of the Alumni Oil Group) who have created an oil & gas exploration through the EIS that is now at a point of showing hard evidence that they have discovered a multi-billion barrel new oil province – potentially worth many hundreds of billions of pounds and, as an unlisted share, they can be bought into at just 20p (currently) with vast upside potential (oil industry investments of this type frequently return many hundreds of times your original investment) and not only do you get the tax benefits upon investment – when ANE strike oil, having rolled over your other CGT gains, you could potentially realise a several hundred times uplift! BEST OF ALL, the exit is CGT free so long as you retain your shares for the minimum 3 year EIS period – is this not a perfect win-win for all of us reaping the benefits of the Vodafone / Verizon Bonanza? For more info, http://www.youtube.com/watch?v=AWFqnbs8Q-0

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business 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.