Published August 30, 2013
Top investors in Vodafone Group <VOD.L> are set to clash over what the company should do with perhaps as much as $130 billion in proceeds from the sale of its stake in Verizon Wireless, which is expected to be announced imminently.
Vodafone shareholders contacted by Reuters as talks continued between the British firm and Verizon Communications <VZ.N> were split between those wanting to see the cash returned as dividends and those wanting the firm to invest it.
Verizon is close to buying the 45 percent stake in the joint venture Verizon Wireless from Vodafone, according to sources.
While some investors relish the idea of a special dividend and buyback spree, others say Vodafone is selling its best asset and must reinvest much of the proceeds in the company's future to avoid reliance on low-growth European markets.
Vodafone's 12-month dividend yield stands at 5.5 percent compared with an average of 5.1 percent for its European and UK peer group, according to Thomson Reuters data.
A lucrative sale of its Verizon stake would free up cash to invest in new infrastructure or to acquire smaller players to diversify and offset a squeeze on revenues in the mobile phone market, where competition is strong and prices are declining.
"You only want a deal done if they are going to do something with it," said a fund manager at one of Vodafone's 10 largest shareholders, who declined to be named.
"The worst-case scenario is that Vodafone takes the money and just hands it all back to shareholders. Then you are left with a weird company that isn't really doing anything."
Vodafone has increasingly diversified from its "pure play" mobile strategy in the last 18 months, buying British fixed-line operator Cable & Wireless Worldwide for $1.6 billion last year and German cable operator Kabel Deutschland for $10 billion in June, its largest deal for six years.
It is also building a 1 billion euro fiber-optic network in Spain with France's Orange <ORAN.PA>. Analysts have said fixed-line assets in Spain such as ONO or Italian broadband specialist Fastweb, which is owned by Swisscom <SCMN.VX>, could be next on its shopping list.
Investors said Vodafone needed to make quick progress on this strategic shift or run the risk of becoming commercially obsolete in a market where many peers are selling packages that combine cable or satellite television, fixed-line services, broadband Internet and mobile phone deals.
"The problem for Vodafone is that they have no infrastructure to be able to offer this quad play ... Pure mobile phone operators are struggling; they have to keep cutting their prices to stay in line with players who can fall back on rising revenues from broadband," the top 10 investor said.
Even some of the company's debtholders, who typically call for conservative use of sale proceeds to pay down debt, suggest some acquisitions might be beneficial for the long-term financial stability of the firm.
Vodafone's net debt is twice its 2013 earnings, according to Thomson Reuters data, in line with the industry median. Its debt is rated A- by ratings agencies Fitch and S&P.
"From a bondholder's perspective, we'd always prefer actions that boost creditworthiness," said Matt Eagan, co-manager of the $22 billion Loomis Sayles Bond Fund and a Vodafone bondholder.
"That would could come from debt reduction in the case of Vodafone. However, I'm not opposed to acquisitions to the extent they boost the firm's business position. Consolidation in this industry has generally been positive from a credit standpoint."
But a second of Vodafone's 10 largest shareholders said he thought investors would want most of the proceeds from a stake sale returned to them as a condition of approving any proposal.
His sentiments echoed those of a third investor among Vodafone's 30 largest shareholders, who said he feared the firm was already too far behind rivals who have the infrastructure in place to offer the combined packages, and the chances of overpaying for assets to catch up with them was too high.
Assuming Vodafone receives $116-132 billion of proceeds from the sale, analysts at Citi said on Friday it could distribute $40 billion in cash and Verizon common stock valued at around $26-34 billion to shareholders. That would equate to a cash distribution of 52 pence a share.
The analysts expect Vodafone to pay around $5 billion in tax, keep $15 billion to reduce debt and retain $30-38 billion in deferred proceeds.
That plan could prove unpopular among some investors.
"We would want as much cash back as possible. I appreciate they have to invest in the core of what will be left post the Verizon disposal, but I think a lot of people once they have their money back will look to exit the equity."
"Look at this another way: people who dispose of assets tend to drive their share price up. People who acquire assets, tend to drive their share price down," the investor said.
However, Vodafone should have enough money to appease both camps, a third fund manager at a top 10 shareholder said.
"Any (acquisition) by Vodafone is going to be in the low-single-digit billions, which in the context of $110 or $120 billion of proceeds, it's a small proportion ... you can give at least half of the cash back, have a bit of a war chest and strengthen your balance sheet," the investor said.