For several months, Wall Street has recognized the hidden value in Vodafone Group Plc (ADR) (NASDAQ:VOD) due to its 45% stake in Verizon Wireless, and it has been speculating about the chance that Verizon Communications Inc. (NYSE:VZ), Verizon Wireless’ 55% owner, would purchase the remaining 45% from Vodafone.
Now, the rumor seems to come closer to reality. Although Verizon Communications Inc. (NYSE:VZ) has not made any official bid yet, the company has hired advisers to make a move to take full control of Verizon Wireless.
According to Reuters, Verizon Communications Inc. (NYSE:VZ) intended to offer a 50/50 cash and stock bid, and it was ready to take the bid public if Vodafone Group Plc (ADR) (NASDAQ:VOD) did not want to discuss for the Verizon Wireless buyout. However, Reuters’ source said that the possible offer price might be around $100 billion. I personally think that a $100 billion price tag is not a fair price for Vodafone.
Verizon Wireless – an important part of Verizon Communications
Verizon Wireless is considered the largest wireless service provider in the U.S., with around 98.2 million in retail connections. In the past three years, Verizon Wireless has experienced a steady growth in its top line, from $63.4 billion in 2010 to $75.9 billion in 2012.
Most of its revenue, $63.7 billion, was service revenue, while equipment revenue was only $12.1 billion in 2012. In 2012, Verizon Wireless generated around $21.77 billion in operating income. Indeed, Verizon Wireless is becoming a very important part of Verizon Communications’ business.
Verizon Communications Inc. (NYSE:VZ)had $115.84 billion in total revenue, and Verizon Wireless accounted for 66% it. Verizon Communications’ operating income came in at $13.16 billion in 2012, while net income attribute to non-controlling interest (in this case 45% of Verizon Wireless’ stake is owned by Vodafone) was nearly $9.7 billion. As Verizon Wireless generated more than $29.7 billion in EBITDA, Vodafone’s 45% stake would be equivalent to $13.36 billion in EBITDA.
Vodafone is cheap when its stake in Verizon Wireless is factored in
If we apply an EBITDA multiple of 9, Vodafone’s 45% stake in Verizon Wireless should be worth at around $120 billion. According to The Wall Street Journal, if the cash flow multiples of comparable industry players were used, Vodafone’s stake should be worth around $130 billion.
Indeed, famous hedge funds manager David Einhorn pointed out that when Vodafone Group Plc (ADR) (NASDAQ:VOD) was worth around $120 billion on the market, the market placed no value on its 45% stake in Verizon Wireless. He said that being a minority owner, Vodafone had suffered, as Verizon Communications Inc. (NYSE:VZ) had restricted Verizon Wireless to pay dividends for years.