As the decline in organic revenues accelerates, is Vodafone a bid target?

<p>Vodafone reported a drop in revenues for the first half of the year as the telecommunications giant battled against a backdrop of headwinds from southern […]</p>

Vodafone reported a drop in revenues for the first half of the year as the telecommunications giant battled against a backdrop of headwinds from southern Europe whilst the firm also announced plans to invest £7bn in strengthening its network coverage by March 2016.

Organic service revenue, the most accurate measure that the market takes when fundamentally assessing bottom line performance for Vodafone fell by 4.9% in the second quarter, marking an acceleration from a 3.5% fall in their fiscal first quarter.

Adjusted profits came in at £5.7bn.

Is Vodafone a bid target for AT&T?

I was asked this question in an interview with Thomson Reuters Insider markets programme earlier. Many saw the sale of Vodafone’s US business to Verizon as opening a door to them becoming a bid target in themselves.

Indeed ever since rumours emerged over a deal with Verizon to sell Vodafone’s US operations, a deal that was finalised at $130bn (a figure above market forecasts), Vodafone shares have rallied 20%. The higher than expected fee increased shareholders appetite to increase their stakes, as the good result normally would, but there are additional motivations behind the 20% share price rise.

Returning cash back to shareholders is one key motivation, but there are other’s.

“When an industry giant sells its left arm, the scent attracts predators.”

The US sale has given Vodafone a stronger cash base from which many predators will view with warmth (some could use this cash as part of an acquisition deal) and what’s more, the sentiment the US sale sends out to the industry is that Vodafone is in ‘deal mode’ – either outward or inward.

AT&T have long been rumoured to be stalking Vodafone. Both firms are in a ‘sticky’ patch and the European telecommunications sector remains ripe for consolidation. AT&T has long sought to expand into the European market and Vodafone, whose European business continues to provide a drag on the bottom line, may view a merger of equals attractive.

However, AT&T is a US company and the timing of any deal here in the near term is laden with potholes of political difficulty. The recent spying scandal where the US was accused of spying on political figures mobile phones (something AT&T have been implicated in) is likely to see any deal with AT&T meet political resistance.

What’s the alternative?

Attack is the best form of defence. Vodafone must use this newly laden cash to attack and seek out acquisitions of its own. Alongside the £7bn investment into its networks, Vodafone must seek strategic acquisitions that strengthen its product innovation and speeds cost synergies, so that any further drag in Europe does not continue to drag on profit margins.

 

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