The Vodafone (LSE:VOD) share price has rallied in recent days due to rumours that the telecoms giant could be a potential takeover target.
The source of the speculation appears to be Betaville, a self-styled “cheeky website”, that says it’s heard reports a European company is considering making an offer.
I have no idea whether there’s any substance behind this story. But a potential bid price of 100p-105p has apparently been mentioned. If correct, that’s a 42%-49% premium to the closing share price on 1 March 2024, valuing Vodafone at up to £27.9bn.
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However, I believe there’s some compelling evidence to suggest that this is seriously undervaluing the company, potentially by up to 110%.
Forecast earnings
Vodafone’s preferred measure of profitability is EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases).
Analysts are expecting this to be €13bn (£11.1bn) for the year ended 31 March (FY24). An offer price of 105p would value the company at 2.5 times EBITDAaL.
I think this is cheap because of recent deals that Vodafone has either completed or is about to conclude.
Real deals
In January 2023, it sold its business in Hungary for €1.6m. The selling price was equal to 8 times earnings for the division.
Eight months later, it announced plans to dispose of its operations in Spain for total consideration of €5bn, including cash of €4.1bn. The company said this was 5.3 times’ its FY23 EBITDAaL in the country.
And last month, it disclosed it was in negotiations to sell its business in Italy for €8bn — 7.6 times the unit’s FY24 forecast earnings.
The group’s expected profit for FY24 includes a full-year’s contribution from Italy and Spain. These two regions have a combined profit of approximately £2bn. I’m therefore going to assume Vodafone’s EBITDAaL will be €11bn (£9.4bn), once these businesses have been sold.
In these circumstances, a bid price of 105p would value the company at just under three times earnings.
That’s still a long way short of the multiple of 5.3 that Vodafone has agreed for Spain. Applying this to the group would imply a valuation of £49.8bn, or 187p a share.
The sum of the parts is greater than the whole
But there’s a difference between buying a part of Vodafone – for example, one of its divisions – and the entire company.
A potential suitor would have to acquire the company’s debt along with all its assets and other liabilities. That’s why the enterprise value (EV) — market cap + net debt — is often quoted when it comes to acquisitions.
At 30 September 2023, Vodafone’s net debt was €36.2bn. Assuming the cash proceeds from Spain and Italy are used to reduce its borrowings, this could fall to €24.1bn (£20.7bn). Adding this to its current market cap of £18.7bn, gives an EV of £39.4bn, or 148p a share.
That’s why I think the company’s worth 110% more than its current share price implies.
But as John Naisbitt, the American author, once said: “Value is what people are willing to pay for it”.
If the rumours are true then it’s clear that potential buyers of Vodafone don’t value the company as highly as I do. However, there’s no obligation on shareholders to accept a bid that they consider to be derisory.
I’m a shareholder and that’s why I’d reject an offer of 105p.
