Vodafone (VOD) has reached agreement to sell its 45% interest in Verizon Wireless to the majority owner, Verizon Communications (VZ), the quoted US telecommunications group. After the optimism of Monday when VOD shares closed at nearly 214p, the shares fell back today (Tuesday 03.09.13) to 202.5p when the details of the deal to sell VOD’s interest in Verizon Wireless were announced. This may have been because:
(a) Less value was being distributed to shareholders than had been expected (although the announcement said that 71% of the net proceeds were to be distributed; this, by the way, on our numbers, implies the costs of the transaction are a truly staggering $12bn)
(b) Or, possibly, the extent to which the value distributed was in Verizon shares and therefore subject to market movement, had been underestimated (Verizon shares fell during UK market hours).
(c) Or the market had begun to focus on the value of VOD ex its stake in Verizon, (where its European exposure stands out).
In summary the make up of the value of a VOD share at 202.5 [so what you now own as a VOD shareholder (with the Verizon price at $46.06)] is as follows:
|Cash to be received*||31.9|
|Value of Verizon shares*||78.6|
|Implied value of continuing VOD||92.0|
|TOTAL VALUE (pence)||202.5|
In other words, some 39% of the current value is made up of Verizon shares (VZ) and a further 16% of dollar cash (although presumably some of this will have been hedged into £). There is downside to the value of shares in VZ (ie if the VZ share price falls).
The remaining VOD has a pro forma Enterprise Value (EV) of £58.3bn at 202.5p and an expected adjusted operating profit of £5bn. The shares will pay a dividend of 11p and, after a share consolidation, will yield roughly 5.4% (at current price).
We are not yet in a position to answer our question about how much Verizon is worth, but the point is that a VOD shareholder now has significant exposure to the Verizon share price (of course there previously was exposure to Verizon Wireless but now (a) The exposure includes the non wireless (ie fixed line) part of Verizon and (b) The value is transparent in the share price (whereas Verizon Wireless was unquoted). Based purely on valuation criteria, we would hold VOD at current price; at current market levels, we would add/buy at 190p and sell around 225p. Attention also needs to be paid to the VZ price performance.