Shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US) are trading around their highest in over a decade. They are buoyed by the impending sale of Vodafone’s share of VZW, which is now nearly certain to happen, and rumours of a bid for the rump of Vodafone from AT&T, which is speculative.
How much of the current share price is due to bid speculation? It’s important to know, as the speculative froth would be blown away if the prospects of a bid evaporated.
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Valuation
It’s difficult to put a valuation on Vodafone when it’s in the midst of major transactions that will fundamentally change its nature. Here’s one way of looking at it.
The prospective payout to shareholders on completion of the VZW sale accounts for around 112p of the share price. What is the rump of Vodafone worth?
Vodafone’s shares were trading range of 160p to 190p before the VZW transaction was announced. At that time the company forecast that adjusted operating profit would be £12.0bn – £12.8bn in 2014. After the sale of VZW, that forecast is reduced to £5bn. If the market values rump-Vodafone on the same basis as before, the value would be similarly pro-rated. That makes rump-Vodafone worth 64p to 77p.
There seems little reason why the shares should be more highly rated than before. Vodafone’s yield will still be around the 5% mark. True, the forecast free cash flow hasn’t been reduced as much as operating profit: £7bn down to £5bn. That, and a stronger balance sheet from the £13bn debt reduction, makes the dividend safer. But on the other side of the coin, the new strategy is untested and there had for a long time been an implicit value attributed to a potential sale of VZW.
Speculation
Adding the rump valuation and the 112p makes a valuation range of 176p to 189p. That leaves 37p to 50p of the current share price arguably explained by anticipation of an AT&T bid. That’s not unreasonable: various brokers such as Citibank and Bernstein are talking of valuations around the 280p mark if AT&T makes a move. On this analysis, Vodafone is worth 280p if AT&T bids and 176p to 189p if it doesn’t.
AT&T has certainly been looking but there are plenty of hurdles, including alternative acquisition candidates and a relatively unfavourable regulatory environment in Europe.
So investors may want to hedge their bets. I followed the directors’ lead and took some profits at around 216p, but I’m holding on to the rest to see what happens for now. AT&T probably won’t show its hand until after VZW transaction completes.
