Vodafone Still Undervalued After German Deal

Morningstar analysts welcome the FTSE 100 telecoms firm's acquisition of Liberty Global assets in Germany but regulators could still kill the deal

Allan C. Nichols 10 May, 2018 | 9:45AM
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Vodafone equity takeover merger German deal telecom stocks Europe

Morningstar equity analysts believe that Vodafone (VOD) shares remain undervalued after the company bought Liberty Global’s operations in Germany, Romania, the Czech Republic, and Hungary for €18.4 billion.

We are maintaining our fair value estimate of 250p for the shares, against a current price around 210p. The deal is still subject to regulatory approval, however, and that could affect our valuation model.

Vodafone is paying a similar price to what it paid for Kabel Deutschland in Germany and Ono in Spain. While we were concerned with the price paid with both of those deals, but they have worked out well with solid growth and good cost reductions, thus we are less concerned with the price Vodafone is paying here.

A deal between Liberty Global (LBTYA) and Vodafone involving their German operations has been rumoured for years, but we have been sceptical primarily for two reasons. One, we didn’t think John Malone – the US billionaire who controls Liberty Global – would part with Germany at a reasonable level, which he has, and two, we didn’t believe German regulators would approve a deal.

German Regulators Could Step In

We remain cautious about approval and are not adjusting our model for the deal yet. At least three times German regulators have stopped attempted mergers between two of the three largest cable TV operators. To get around the German regulators, Liberty Global and Vodafone expect this deal that includes assets from four countries to go to European Union regulators instead, who they expect will approve the deal.

While EU regulators have been very tough on wireless mergers that take the number of full mobile operators from four to three, they have been quite sanguine regarding consolidation within the satellite TV industry as they view cable TV operators as being strong competitors against the incumbent telephone operators.

EU regulators have allowed Liberty Global to acquire Ziggo, which consolidated the Dutch cable TV market, and Virgin Media, which is now owned by Liberty Global, to consolidate the UK satellite TV market. However, we expect the German regulators to make a fuss, which could yet kill the deal.

We believe this deal shows the increasing importance of convergence in Europe, which has been a big theme of ours for several years. Thanks to leverage and running the business well Liberty Global will walk away with having taken out more than six times the amount of cash they originally invested in the business, which is a phenomenal return in about eight years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Liberty Global PLC Class A17.24 USD0.29Rating
Vodafone Group PLC71.62 GBX-0.91Rating

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Allan C. Nichols  Allan C. Nichols

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