10:55 Thursday 18 October 2018.
2018 has been a troubling year for Vodafone in the eyes of many investors, however acquisitions and new services show signs of a brighter future. In this article we will look at what has happened with Vodafone recently and look forward to the issuance of hybrid bonds that may clear debt and inspire investors as well as any changes to the dividend pay outs.
Vodafone has established itself as one of the biggest mobile and fixed line providers in the world and deals in recent years have seen them operate throughout the US, Europe, Africa, Asia and Australasia. The comms giant provides known mainly for their retail mobile network service that operates in over 25 countries, also provides fixed line services like high speed broadband as well as business solutions. Expansion and development has been a blessing and curse for Vodafone in recent times as whilst they have recently completed deals to place them as leaders within many vast territories including India, Australia and Europe, these mergers and acquisitions have taken time with regulatory issues and have cost £billions to undertake, both of which have taken their toll on the share value. Expansion for Vodafone is an ongoing process and they are currently front runners in many global areas to be the first, and in some cases only, providers of new technology solutions such a Giga-Fast broadband and 5G networks. The global coverage and digital development that Vodafone are famous for has been achieved through their boldness in the M&A department and their ability to merge, make and break partnerships on a global scale. Historically, one of the key features investors have relied on Vodafone for, is their commitment to pay regular and increasing dividends year on year.
CURRENT DEVELOPMENTS AND DEALS
Recently, mergers were completed in both India and Australia to ensure they would not be locked out of market due to the size of the leading competitors. In India, the merger with Idea was needed to ensure they didn’t lose further ground to local comms companies Reliance Jio and Bharti Airtel, and whilst the deal had to handle several regulatory issues, it has now been passed. The deal with TPG Telecom in Australia has seen the newly merged company secure a place as one of the leading providers down under. Both of these deals come off the back of the purchase of Liberty Global’s cable assets in throughout Europe, including Germany, Czech Republic, Romania and Hungary. Like the Indian and Australian deals, the Liberty Global acquisition has led to Vodafone being a rival to the German national firm, Deutsche Telekom. The deals in Germany and Australia also place them in pole positions to be the first network provider to place the infrastructure for 5G networks and Giga-Fast broadband in the territories. The recent deals were necessary in order to remain leaders within each region, but they all came with billions of debt that will need to be addressed by the Vodafone board, especially as they will likely be seeking to maintain their dividend pay-out and growth. Whilst some of the debt can be addressed from the projected growth in business in the area, others, like the Australian deal, will see Vodafone handle the debt by shifting it to the new company and service it via divided payments while also guaranteeing it. This practice will also encourage the new company to pay a higher dividend in order to facilitate the arrangement.
A Troubling 2018 for the Share Value
Despite the growth, bright future and completion of M&A deals that 2018 has brought, many investors will be more concerned about the falling value of Vodafone’s share price in the same time period. As alluded to previously, the new projects completed and undertaken by Vodafone have piled on debt to the company and the projected profits they will be bring are more in the long term view. Investors will have noticed that in the year to date, Vodafone has underperformed the FTSE by over 27% (excluding dividends).
There has also been a change in leadership at Vodafone this year, which can quite often knock the share value. On the day that former boss, Vittorio Colao, announced his decision to stand down, shares fell by nearly 4% alone, and while his replacement, Nick Read, is an inside man this didn’t do much to ease the transition in terms of price. Read had been groomed for the job. He joined Vodafone in 2001 leading the UK, African, Asian and Middle Eastern side of the business, before being promoted to CFO in 2014. Another factor weighing down on the share value is the growing cost of investment in infrastructure and mobile services. Again, Vodafone being cut down by its own growth.
HYBRID BONDS, FUTURE DIVidENDS & RESTRUCTURING
Vodafone currently sits on approximately €53bn of debt and have a free cash flow of €6.44bn and activist investors such as Elliott will apply pressure on the board if the dividends are not increased. To cover the costs of maintaining or increasing the dividend, Vodafone will have to look for solutions. One asset that can quickly be called upon by Read would be to sell some or all of the signal towers that Vodafone own. Despite the increased cost in having to lease the towers back, it would be a big cash injection into the company and aide bringing down debt both of which would make this and future dividend payments far more realistic and ease concern of investors.
In addition, at the end of September Vodafone announced their intention to issue hybrid bonds in a bid to raise €4bn to support the purchase of Liberty Global’s assets in addition to assisting the company uphold their investment grade status. Hybrid bonds are not issued frequently by companies with the last major issuance being by BHP Billiton back in 2015, however they prove popular with investors as they hold characteristics of both debt and equity securities and offer a higher yield than conventional corporate bonds.
With some of these factors in mind, including the drop in share value, Vodafone has received a Buy recommendation from Deutsche Bank and an Overweight recommendation from Barclays who set a target price of 220.00. At the time of writing, Vodafone currently sits at 153.78 and with the recent recommendations, opportunity for growth and likely dividend, it would be entirely reasonable for any investor currently holding Vodafone stock to hold and potentially increase their stake prior to any growth in value or payment made.
If you would like any further analysis or information on Vodafone stock, feel free to contact a broker on 0121 4540770.
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