Vodafone Group Plc (VOD), the largest revenue generating international wireless carrier, announced the sale of its entire 3.2% stake in China Mobile (CHL) for £4.3 billion ($6.6 billion). China Mobile is the world’s largest mobile operator by market capitalization and subscribers.
The sale is a part of Vodafone’s new strategy announced in July to exit minority holdings and focus on core markets in Europe, Asia and India. Vodafone is reviewing all its minority holdings such as 44% in SFR, a French operator and 45% in Verizon Wireless. Verizon Wireless is a venture between Verizon Communications (VZ) and Vodafone.
The new strategy, driven by mobile data, positions Vodafone for further growth in Europe. Additionally, Vodafone is looking for expansion in emerging markets, such as Eastern Europe, Asia and Africa to fuel growth.
Approximately 70% of the net proceeds from China Mobile are expected to be returned to shareholders via share repurchase and the remaining proceeds will be used to repay debt.
Vodafone returned to organic service revenue growth in the first quarter of fiscal 2011 for the first time in six quarters. Growth was strong in Africa and Central Europe, Asia Pacific and the Middle East, offsetting a decline in European revenue. Consolidated data revenue increased 31.5% year over year, boosted by expanded market penetration of smartphones across Europe.
We believe that investors have been concerned about a less favorable business outlook in Europe (especially in Spain, Germany and the U.K.). However, Vodafone is expanding its businesses in India and other emerging mobile markets. Moreover, 3G wireless services coupled with iPhone will likely foster revenue growth per subscriber in Europe offsetting challenges from stabilizing subscriber count in a highly matured market.
Despite expectations of limited near-term economic recovery in Europe, we believe the company’s financial prospects remain attractive relative to other large capitalization telecom carriers. However, we are concerned about deteriorating margins, aggressive price competition in India and the company’s over-reliance on cost cutting to boost operating results. Moreover, high spectrum acquisition costs may raise the debt level of the company.
We are currently maintaining our long-term Neutral rating on the stock with a Zacks Rank #2 (Buy).
CHINA MOBLE-ADR (CHL): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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