Vodafone is Undervalued, Say Analysts

Despite concerns over a German acquisition, analysts still rate Vodafone as a four star stock - trading at 13p less than its fair value 

Allan C. Nichols, CFA 16 August, 2013 | 10:24AM

A German court has blocked Liberty Global's LBTYA 2011 acquisition of Kabel Baden-Wuerttemberg. We think this ranks as one of the worst corporate court decisions ever, though we've seen worse in Russia and other Commonwealth of Independent States countries. The German regulator approved the acquisition before it was allowed to be completed. To come along now, two years later, and say it isn't legal is extreme, in our opinion. Because of Liberty Global's problems in previous acquisition attempts in Germany, the purchase was originally in question, but once the regulator approved the deal, the decision should have been final. Liberty Global will appeal the decision, and we think something can ultimately be worked out, but we are frustrated by the inconsistencies in regulator and court rulings throughout Europe. 

This court ruling also brings in to question Vodafone's pending acquisition of Kabel Deutschland, given the acquirer's extensive telecom business in Germany. At a minimum, we expect this will lengthen the review process and delay the closing of the deal. We have not yet included Kabel Deutschland in our Vodafone model, and we won't until the deal closes. For now we are maintaining our fair value estimates and moat ratings for Liberty Global and Vodafone. However, if Liberty Global is forced to sell Kabel Baden-Wuerttemberg, it would probably have a negative effect on our fair value estimate, as it is one of the firm's best-performing assets and provides cost benefits with Liberty Global's other German operation, Unitymedia.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Vodafone Group PLC126.90 GBX1.75

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.

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