Vodafone Group Plc (VOD), the largest revenue generating international wireless carrier, is still in talks with Vivendi to sell its 44% stake in SFR (their French joint venture).
The talks are in initial stages as the final sale price of SFR has not yet been agreed upon by the two parties. Vodafone is expecting €8.5 billion ($11.8 billion) from the sale. But Vivendi is unwilling to pay more than €6.9 billion ($9.64 billion) for purchasing the minority stake.
We believe the two parties will strike a deal in-between sometime later in the year as the deal holds benefits for both.
Holding full ownership of SFR is the first priority for Vivendi. The possession of SFR may boost its profits and cash flow profile and set a trail for future business growth. Being an important engine for Vivendi’s growth, we believe it will continue to negotiate on Vodafone’s SFR.
From Vodafone’s standpoint view, the sale of SFR is the part of its strategy, announced last year, to exit minority holdings and focus on core markets in Europe, Asia and India. This strategy will position Vodafone for further growth in Europe driven by mobile data. These moves would also strengthen Vodafone’s position relative to its peers.
This new growth strategy is expected to generate annual organic service revenue growth in the range of 1% to 4% and free cash flow in the range of £6.0 billion to £7.0 billion over the next three years. Over the same period, Vodafone expects EBITDA margins to stabilize, as the company benefits from continued cost efficiency, regional scale and improving margins in various markets including India.
Moreover, Vodafone continues to invest further in its European network to catch up with the surging smartphone demand through different tiered pricing plans. The company’s cost reduction program in Europe will also reap benefits by 2013.
Last year, Vodafone exited its minority holdings in the Japanese wireless operator Softbank Corporation for £3.1 billion ($5 billion) as well as its 3.2% stake in China Mobile (CHL) for £4.3 billion ($6.6 billion). Currently, Vodafone is reviewing more minority holdings, mulling a sale of 25% stake in Poland’s Polkomtel and a 45% stake in Verizon Wireless. Verizon Wireless is a venture between Verizon Communications (VZ) and Vodafone.
As Vodafone is in the process of selling its minority stake to focus more on growth prospects in emerging markets, we are currently marinating our long-term Neutral rating on the stock with the Zacks #3 (Hold) Rank.
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