Vodafone Better Equipped to Meet Dividend Goal

Vodafone's sale of its stake in SFR makes us more confident that it will be able to meet its dividend objectives

Allan C. Nichols, CFA 5 April, 2011 | 9:46AM
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We are pleased with the announcement that Vivendi (VIV) will acquire Vodafone's (VOD) 44% interest in SFR. This is a deal we expected once Vivendi succeeded in selling its 20% stake in NBC Universal. The NBC deal closed in January, so the two firms took less than three months to negotiate the price for SFR. Vivendi will pay EUR 7.75 billion (£6.83 billion) or about 6.2 times reported 2010 EV/EBITDA. We think this is a pretty fair price and don't expect it to have much of an effect on our fair value estimate for either firm. The deal valuation is higher than what most European phone companies are trading for, but it provides Vivendi with complete control. Vivendi will also pay Vodafone a EUR 200 million (£175 million) dividend for the first six months of 2011.

For Vivendi, this deal allows it to access all of SFR's substantial free cash flow and raise its dividend. It also provides a use for the cash it received from selling NBC Universal and the settlement with Deutsche Telekom (DTE) over its Polish assets. We expect the additional debt Vivendi will take on will also improve its return on invested capital as the firm has become underleveraged.

For Vodafone, the deal allows the firm to exit another minority holding while still maintaining a roaming relationship in a key European market. The cash will also allow it to further increase its share buyback and reduce its debt. We have been concerned about the firm's ability to meet its objective of raising its dividend 7% annually through fiscal 2013 when the dividend subsumes virtually all of its free cash flow. We expect the improved balance sheet to provide a needed cushion to meet its objective until it receives a dividend from its stake in Verizon Wireless.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Vodafone Group PLC74.14 GBX0.46Rating

About Author

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

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