Despite recent clarification about the future structure of the group, the Vodafone (LSE:VOD) share price appears unable to break through the 70p-barrier. But with the company having entered into binding agreements to sell its operations in Spain and Italy, I think that could soon change. And as a shareholder, I hope I’m right.
Financial performance
Last month, the company said it expects adjusted EBITDAaL (earnings before interest, tax, depreciation, and amortisation, after leases) to be €13.3bn, for the year ended 31 March 2024 (FY24).
But this includes the results of the two divisions that it plans to sell. Fortunately, there’s enough financial information available to estimate how a slimmed down Vodafone might perform.
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In FY23, Spain had an EBITDAaL of €947m. Once the FY24 accounts are finalised, Italy is expected to have contributed €1.05bn to earnings. To keep things simple, I’m going to assume that a restructured group will be €2bn less profitable (€11.3bn).
Real deals
When assessing company valuations, it’s useful to look at actual deals, in the same sector, that have recently been agreed. So I’m going to consider the two that Vodafone has announced, to see what it might be worth if it was sold.
The company is selling Spain for 5.3 times its FY23 adjusted EBTIDAaL. For Italy, it’s agreed a price of 7.6 times FY24 earnings.
Applying the lower of these figures to my post-restructuring earnings of €11.3bn would give a valuation of €59.9bn (£51.4bn).
Does this mean the telecoms giant is currently worth nearly three times more than its current market cap?
I don’t think so. That’s because borrowings need to be taken into consideration.
Don’t forget the debt
Typical of most transactions of this type, the two divisions are being sold on a debt-free basis. This means the seller is left with the problem of how to deal with the associated borrowings.
At 30 September 2023, Vodafone’s total debt was €65.1bn. But there was also a lot of cash on its balance sheet (€28.9bn). Offsetting these two amounts gives a net debt position of €36.2bn.
But the company plans to use €8.1bn of its disposal proceeds to reduce its gearing. Net debt would then fall to €28.1bn.
So, if Vodafone was sold for €59.9bn, and €28.1bn of the proceeds (and its cash at bank) was used to pay off its borrowings, there would be €31.8bn (£27.2bn) left over to return to shareholders. Based on the current number of shares in issue, that would be 100p per share.
On this basis, the company appears to be undervalued by nearly 50%.
On the other hand
But a different set of assumptions suggests the telecoms giant is even more of a bargain.
If Vodafone was valued the same as its business in Italy, there would be €57.8bn (£49.6bn) available to be returned to its owners — £1.83 per share!
Of course, this is a very simple way of looking at something that is hugely complicated. And a company is only worth what someone is prepared to pay for it. The huge variation in these two valuations also highlights some of the problems associated with such an exercise.
But it does give me some hope that the share price will soon climb above 70p and — hopefully — much higher.
