FTSE 100 telecoms giant Vodafone (LON:VOD) this week swooped on Cable & Wireless Worldwide (LON:CW.) in a £1.04 billion deal that now seems likely to bring a modestly priced end to a particularly miserable couple of years for the flagging communications group and its shareholders. For Vodafone – currently among the best dividend payers in London – the deal offers some interesting new avenues in the all-important Enterprise market.
What’s the story?
Vodafone’s offer of 38p in cash for every CWW share was never at risk of appearing generous although the price represents a near 100 percent premium on where CWW was trading in mid-February when sketchy details of a deal first emerged. No surprise then that the board have recommended it – bringing to a premature end Gavin Darby’s four month tenure as chief executive (CWW’s third CEO in a year) and coming just two years after the demerger of Cable & Wireless Worldwide and Cable & Wireless Communications. For shareholders of CWW, the deal crystallises a generally poor performance over that time, which saw the stock price tumble from 92p to 14p.
For Vodafone, the acquisition brings with it CWW’s fibre network, which offers numerous cost saving advantages, along with the more significant opportunity to boost its exposure to corporate markets at home and abroad. Two years ago, chief executive Vittorio Colao set out a new growth strategy that included a focus on the Enterprise segment, where there is apparently strong demand for unified communications services. This deal will help Vodafone provide just that.
What’s the bull case?
In market conditions where dividends hunters are having a field day, Vodafone’s 5.2 percent current yield (and a forecast yield of 8.3 percent) is among the very best. Its figures were flattered last year from the opening of the dividend taps at its 45 percent owned US business Verizon Wireless, which arrived mid-way through a three year commitment by Colao to produce 7 percent dividend growth annually. The good news is that Verizon Wireless’s first quarter figures released this week were positive and well-received by the market. All eyes on Vodafone’s May prelims, then.
Dividends apart, Vodafone is rated a ‘buy’ among the majority of analysts – some of which periodically speculate about the possibility of Vodafone and Verizon Wireless merging. Either way, it is clear that the two sides are on better terms now that dividends have begun flowing again (Verizon shelved the payouts in 2005 in favour of paying down debt). Meanwhile, Colao has shown that despite its monolithic size, Vodafone is keen to strengthen its position in key markets and won’t be forced to pay too high a price to do it, but…
What to watch?
…not everyone is happy with the CWW acquisition price. UK fund manager Orbis, which is CWW’s majority shareholder, claims the business is worth much more to Vodafone than 38p per share – and analysts tend to agree. However, the only realistic alternative is Indian group Tata, which is believed to have been struggling to justify a 25p per share offer of its own. So it is hard to see what option CWW, or Orbis, really have. Despite not backing the deal publically, Orbis’ 19 percent stake isn’t a showstopper depending on how (and if) Vodafone structures the purchase.
Meanwhile, one rather surprising note of caution about Vodafone is that it appears to be showing an Altman Z2-score in the potential distress zone – meaning that according to that quantitative metric at least, the company presents some risk of bankruptcy. In its initial testing, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event. Frankly, though, it’s hard to believe this is a tangible risk in this instance given the company’s profile, and the Altman test does produce false positives from time to time, but still it's interesting to note this. The Piotroski Financial Health trendscore of 7 looks far more healthy.
What kind of investors might look at Vodafone?
Vodafone’s dividend performance has been a big draw for investors and unsurprisingly, given the company’s size and dividend yield, it easily earns a place on our Dividend Dogs of the FTSE trading strategy. For investors that want a conservative and relatively simple stock selection technique, Dividend Dogs picks the 10 highest dividend yielding stocks in the FTSE 100 and backs them equally for one year. The screen itself has delivered an 8.76 percent return over the past three months versus a fall of 1.26 percent for the FTSE 100.
Vodafone’s sparkling dividend also qualifies it for Stockopedia’s take on James O’Shaughnessy’s Cornerstone Value screen which, like Dividend Dogs, seeks out large cap dividend stars but with a handful of additional criteria.
Vodafone’s annual results are due in mid May and investors will be watching closely to see how the combination of Verizon Wireless, fragile consumer markets and the potential addition of CWW influence the tone of the report. If Calao gets his way with CWW, it will not only mark the end of a well-known (albeit troubled) British brand but it will also mark another significant step in Vodafone’s longer term growth strategy.