Last week, I wrote that Vodafone (VOD) was one of David Einhorn’s top picks. I did some due diligence on the stock, and it seems like a great investment.
Vodafone provides mobile telecommunications services and has significant market share in:
- Mature European countries such as England (100% ownership, 26% market share), Spain (100% ownership, 29% market share), Germany (100% ownership, 34% market share), Italy (100% ownership, 36% market share).
- Less Mature Asian and African countries such as India (64.4% ownership, 29% market share), South African (Vodacom Group, 65% ownership, 58% market share)
- United States through 45% ownership of Verizon Wireless
- Many other countries through partnerships and equity investments.
Vodafone has a market capitalization of $135 billion. Its most valuable piece is the 45% stake in Verizon Wireless. The other 55% stake is owned by Verizon.
Verizon has a market capitalization of $125 billion and long term debt of $50 billion. Verizon has two business segments:
- Verizon Wireless. Verizon Wireless has total revenue of $80 billion. Since Verizon owns 55% of Verizon Wireless, $44 billion of that $80 billion belongs to Verizon. That $44 billion makes up about 1/2 of Verizon’s total revenue. Verizon Wireless also makes up all of Verizon’s operating income.
- Verizon Wireline (FIOS, etc..). Wireline makes up the other 1/2 ($40 billion) of Verizon’s total revenue. It has pretty much break even operating income.
Verizon Wireless should make up a majority of Verizon’s market capitalization:
- Contributes to half of revenue.
- Makes up less than less than $10 billion of Verizon’s total $50 billion long term debt.
- Makes up all of its operating income.
Conservatively, it is probably worth around $100 billion.So, Vodafone’s ‘s 45% stake is worth around $80 billion. Einhorn argues it is worth even more.
“Look at it from Verizon’s perspective: Historically, Verizon had a very profitable landline business, and Verizon Wireless owed it billions of dollars. Verizon received Verizon Wireless’s free cash flow as it repaid the debt. For years, Verizon used its control to try to starve VOD by refusing to allow Verizon Wireless to pay dividends. Today, Verizon’s landline business generates no cash and the debt from Verizon Wireless has been repaid. Verizon’s 55% control stake in Verizon Wireless is probably worth more than all of Verizon’s market capitalization, and Verizon has become wholly dependent on dividends from Verizon Wireless to fund its parent company obligations and shareholder dividends”
The rest of Vodafone (excluding Verizon Wireless) in fiscal 2012 had FCF of $6 billion pounds or almost $10 billion. At a valuation of 10 times FCF, the rest of Vodafone is worth $100 billion. According to Einhorn, it should be valued at 12 times earnings, in line with other European Telecoms.
So, the total value of Vodafone is $180 billion or 33% above its current market capitalization of $135 billion.
Vodafone seems to be a great investment. There is significant upside and investors are paid to wait with the juicy dividend.
DIsclosure: I own Vodafone