Did Verizon Make A Smart Move?
09/09/2013 12:00 pm EST
The recent purchase of Vodafone's remaining interest in Verizon Communications creates an interesting opportunity says Jim Jubak, but it probably is not the one you think.
I normally don't like to buy stocks that are predicated on a company not executing its strategy, but I think if you're looking at the recent deal between Vodafone and Verizon—over the Verizon wireless partnership, that's exactly what you see when you look at Vodafone. So Verizon and Vodafone had a partnership that controlled Verizon wireless. Verizon has spent $172 billion, some ungodly amount of money, to go out and buy the stake in Verizon wireless that it didn't have, so it gets the whole thing.
What Vodafone gets is a lot of cash, and what Vodafone has said looking around is, "Uh-oh, if we have a lot of cash and if we don't put it to work, we become an acquisition candidate ourselves." Because we've got a lot of cash, we've got some decent assets, and, in fact, right now, it looks like we're a pretty good pure play on Europe for a company like AT&T, that wants to build up its market share in the Euro zone.
So, the strategy that Vodafone is going to pursue to try to avoid becoming an acquisition candidate itself is to go out and make small acquisitions. There aren't a whole lot of acquisitions, you can buy a few players in Europe, you can buy some players in the emerging markets. The idea is that they'll be able to spend down their cash, at least the cash that remains after they have paid their dividend, and Verizon is also going to pay part of those prices in stock, so they won't have all cash, but basically, the idea is that you spend enough money so that you don't have a lot of cash sitting there, so that an acquirer can't use your cash to basically acquire you, and that's the strategy.
Now, I'm hoping that once the dust is cleared, that Vodafone is reasonably priced enough, so that I might actually be able to put some money on the hope that this strategy doesn't succeed, because I think Vodafone, as an acquirer of other small wireless companies is a whole lot less interesting as an investment, than Vodafone as a company that's going to be acquired. The likely acquirer, looking at markets, you know, looking at the size of the companies and various sundry pieces of who owns pieces of what, is AT&T. So, what I'm looking for is Vodafone being able to spend $5 billion, $6, $7, $8 billion, but still having a lot of cash, being a very attractive candidate, and there being some bid from AT&T for those assets in Europe. That, I think, would be the best thing that would happen if you're an investor in Vodafone is for Vodafone's strategy not to work.
This is Jim Jubak for the MoneyShow.com video network.