Vodafone sale of VZW interest

Vodafone the second largest ( behind China Mobile) mobile telecoms company in the world. I have a holding in my income portfolio (epic code: VOD).

So yesterday Vodafone announce the agreed sale of their 45% interest in Verizon Wireless (VZW) to Verizon  Communications Inc. (VZ) for $130bn (£84bn).  VOD have agreed to distribute $84bn (£54.3bn) back to shareholders.

The distribution (return of capital) will be £38.9bn in the form of VZ shares and £15.4bn in cash, sterling amounts will depend on the US$/£ rate and the VZ share price.  The company have also stated that there will be special provisions for holders of less than 50,000 shares of VOD to enable them to sell the VZ shares in a cost efficient manner.

For any long term income investor this is crystallisation of value of an investment held and a return of capital, requiring reinvestment of the proceeds at an equivalent yield if they wish to maintain their income stream.

The other issue for all long-term investors is the VOD business post sale.  Management state that expected EBIT is likely to be £5bn in 2014 (excluding VZW but including 100% of Vodafone Italy), this compares to a like-for-like EBIT of £5.8bn for 2013.  Free cash flow is expected to be £4.5-5.0bn.  At the current price of 202p the market is placing an EV (enterprise value) of £47bn on the remaining rump, an EV/EBIT of 9.4x 2014 or 8.1x 2013.  This compares to the EV/EBIT of 13.1x for the sale of 45% of VZW, which is probably about right considering VZW's higher expected growth and historical performance.

The consolidation of share capital is likely to be in the region of 5 new shares for 11 currently held to allow for the return of capital that is equivalent to 112p per share, although this may change due to the VZ share price, the US$/£ exchange rate and the VOD share price.

As a rough guide to looking for a home for the capital that I will receive, I need to look for a minimum yield of approximately 4.8%, to be in the same position I expected to be in before the sale of VZW.  This is based on the original 11 shares producing an expected dividend of £1.144 (original market expectation of 10.4p per share) deducting the 11p per share dividend in VOD's statement for the 5 new shares i.e. £0.55 leaving me £0.594 to be  achieved on the £12.32 I have available i.e. 112p returned multiplied by my original 11 shares.

The VZ shares are unlikely to meet my dividend criteria, so I will need to sell them in the open market.

I could of course reinvest the proceeds back in to Vodafone shares that are likely to yield around 5.4%, although there is some considerable time before I need to make a decision.