VOD has underperformed Euro Telcos by -13%, YTD. We believe concerns over a potential premium bid for Liberty are over-stated. We see upside from LTE, Phase 2 of Spring, S Europe and a return to growth (op leverage). It will pay 19p DPS over the next 13mths.
LTE should boost revenue growth rates further, as seen in the UK & Germany
(Exhibits 10-11). Second, we expect sharp turnaround in performance in Italy
(LTE, potential consolidation, macro) and Spain (five recent market price
increases, LTE, macro). Third, Project Spring has delivered network quality
catch-up in the UK (Exhibit 16) and Germany. We expect Phase 2 (Apr 15 - Mar
16) to deliver Better Network in both markets, as well as in S Europe.
* Vod/Liberty Global – deep dive. Past media articles suggesting a Vodafone
bid for Liberty (covered by Benjamin Swinburne) have triggered Vodafone
share-price weakness (e.g. 1 Dec 14 Bloomberg report, VOD shares: -3%).
Concerns centre on bid premium, dilution and DPS. However, we believe there
could be strategic merit in some combination: Recent deals suggest synergies
could be £15.7bn (59p/sh, MSe, Exhibit 2); a combination of Liberty's DOCSIS.
3.1 network with Project Spring could create a 'Best-in-Class' convergent
network; individual structural challenges (e.g. Vodafone: backhaul, Liberty:
mobile, retail) could be tackled. On the downside, regulatory approval, cultural
differences, integration and brands could pose challenges. In addition, there
are complications around Liberty's super-voting shares (largely held by
Chairman Malone). Potential EFCF/sh dilution could limit the possibility of a
Vodafone bid for all of Liberty Global, although accretive asset sales & spinoffs
could help (in conjunction with a broader combination). Alternative
scenarios are 1. Merger 2. Country-by-country deals (Exhibit 4-5); or 3.
Commercial agreements. The first two options could still deliver synergies, we
believe.
* Potential change in investor perception – as we swing to positive
growth: We expect Vodafone service revenue growth to move to positive
territory in Q4 14/15 (Q2: -1.5%, Q3: -0.4%, Q4e: +0.2%, MSe) and FY 15/16e
(+1.7%, MSe). In this note, we have identified six reasons why Vodafone
EBITDA trends should improve markedly in H2 14/15, and again in FY 15/16.
Where could we be wrong? BT, DT and TI could replicate the success of
Telefonica Fusion. Challengers could drive LTE bundle prices lower.