Vodafone

The first company in my list of 2o investments is Vodafone.

The thinking being Vodafone has a hidden asset in the form of a 45% stake in Verizon Wireless. This is likely to be realised when the Verizon Wireless starts paying a dividend to shareholders.

Below is some of the places where I found this idea.

Vitaliy Katsenelson – Contrarian Edge

• Verizon Wireless has not paid dividends to Vodafone since 2005 and thus the street puts almost zero value on Vodafone’s stake in Verizon Wireless.
• Verizon does need the dividend from Verizon Wireless, as Verizon’s wireline business doesn’t generate enough free cashflow to cover Verizon’s (the public company) dividend payments.
• Verizon Wireless is the cash cow, generating about $10 billion of free cashflow a year, and is responsible for a large portion of Verizon’s free cashflow.

Manual of Ideas – 28 January 2010

• In summary we add the estimated value of Vodafone’s 45% stake in Verizon Wireless and the estimated equity value of the rest of Vodafone, i.e. the current stock price, to arrive at a fair value for all of Vodafone operations of £1.85 to £2.11.

Manual of Ideas – 27 August 2010 (pdf)

• Estimated value of Vodafone’s 45% stake in Verizon Wireless is between £0.51 – £0.78 per Vodafone share.
• Using a current share price (as at August 2010) of £1.50 that gives a total value of £2.01 – £2.28 per share.

David Einhorn – 4 May 2010

Vodafone remains at a large position in the portfolio.

The basic thinking there is that the share price does not reflect a full valuation or even maybe even any valuation for Vodafone’s 45% interest in Verizon Wireless. Because right now, Vodafone doesn’t get any cash from Verizon Wireless, so it doesn’t show up in any of their cash flow metrics or in their dividend yield which tend to be some of the kinds of things that some of the sell side and buy side analysts look at. What’s interesting about it is as most of the cash from Verizon Wireless has been going to repay inter-company debt to Verizon. And that debt has been a substantial amount over the last couple of years which is now almost complete. Within the next month or two, all of that inter-company debt be repaid and then it will be interesting to see how Verizon and Vodafone work out what to do about the Verizon Wireless cash flows at that time. So, we’re hopeful that that – however that is resolved, it will be in a way that will more fully reflect Vodafone’s substantial ownership in Verizon Wireless and we hope that that will reflect in Vodafone’s share price.