EUR 850.00 For Business Accounts Only

Morningstar | Vodafone Announces Deal to Sell Vodafone New Zealand; Shares Undervalued

On May 13, Vodafone announced it agreed to sell Vodafone New Zealand to Infratil and Brookfield Asset Management for an enterprise value of NZ $3.4 billion (EUR 2.1 billion, $2.2 billion). Vodafone previously attempted to merge its New Zealand business with Sky New Zealand and, more recently, with TPG. However, both deals were struck down by regulators. With Vodafone's efforts to grow in New Zealand thwarted by regulators, it chose to exit the market and will use the cash to reduce debt. The deal values the business at 7.3 times fiscal-year 2019 adjusted EBITDA, excluding leases. We believe this is a fair price and don’t see any changes to our GBX 250 per local share fair value estimate. Our narrow moat rating is unchanged, and we believe the shares are significantly undervalued.

The stock fell over 5% today due to a report in The Sunday Times that Vodafone would cut its dividend when it announces fiscal 2019 results on May 14. While we acknowledge a dividend cut is a possibility, we see no reason for one while its acquisition of Liberty Global’s assets in Germany, Romania, Hungary, and the Czech Republic is still pending regulatory review. If the deal isn’t approved, we believe Vodafone has plenty of debt capacity to finance any shortfall in free cash flow to cover the dividend. If the Liberty Global deal is approved, then its debt capacity will be very limited, and we think a dividend cut may be needed. However, even then it isn’t a sure thing, and the cash from the New Zealand deal will go a long way in covering any shortfall. Thus, we maintain our expectation that the dividend isn’t cut tomorrow. However, the odds of a later dividend cut increased last week, as we think Vodafone’s announcement that it will wholesale capacity to Telefonica Deutschland if the Liberty deal closes increases the likelihood the deal gets consummated.