Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) remains an attractive potential opportunity for large telecom providers looking to diversify out of their home markets, believes Citi.


Simon Weeden and team at Citi believe Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) is a unique strategic asset for a buyer from outside Europe and would expect any bid for control to only be successful at a premium multiple.

Vodafone – An attractive opportunity

Recently, it was reported AT&T Inc. (NYSE:T) is considering putting together a Vodafone Group Inc merger as soon as next year. The Bloomberg report elaborated that AT&T Inc. (NYSE:T) is laying the groundwork for a deal that would see it acquire the British telecommunications company.

Following the recent Bloomberg report, Citi analysts explored the issue further and concluded that Vodafone remains an attractive potential opportunity for large telecom providers that may be looking to diversify beyond their home markets.

Citi analysts believe with competition and regulatory constraints potentially weighing on growth for several large global operations in their home markets, Europe has become a region of interest thanks to several factors including low interest rates helping finance a transaction and opportunities for the economy and the LTE product cycles to spur incremental mobile broadband revenues.

Barbarians at the gate?

Simon Weeden and team at Citi believe AT&T Inc. (NYSE:T) and Softbank Corp among global telcos are large enough to be credible potential bidders for Vodafone, with America Movil SAB de CV (NYSE:AMX) as a candidate to take part of the company in a possible break-up scenario.

Citi analysts think an acquisition of Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) could make sense for SoftBank, as it is seeking scale and likely to prioritize network capabilities. With Vodafone’s ample spectrum in the 2.6 GHz band, it is probably attractive to SoftBank given its focus on TD-LTE. Citi analysts point out that if Softbank Corp (OTCMKTS:SFTBF) (TYO:9984) is able to use spectrum in this band in each of Japan, the US and Europe, it would quickly be able to derive benefits from device and equipment cost synergies.

Turning their attention to AT&T, Citi analysts believe AT&T could benefit from the triple-bottom thesis viz.: the economic cycle, the industry regulatory cycle and the product cycle of moving to LTE at or close to their respective troughs in Europe. Hence, the analysts point out that the opportunities from a rebound in each of these three cycles could create value across the European Telecom sector.

The Citi analysts believe America Movil SAB de CV (NYSE:AMX) could be a possible partner to AT&T given their commercial relationship and AMX’s ambitions to expand in Europe that are already evident from its purchase of stakes in KPN and Telekom Austria AG (VIE:TKA).

Limited downside for Vodafone

Simon Weeden and team at Citi point out that post its distribution of part of its VZW sale proceeds, Vodafone’s EV will be £75 billion ($121 billion) based on current market prices.

Vodafone's Core EV-EBITDA

As is evident from the above graph, the analysts estimate Vodafone Group Plc (NASDAQ:VOD) (LON:VOD)’s core business post the sale of Verizon Wireless and distribution of proceeds to shareholders trades at 5.5x EBITDA for FY15E compared to the European sector ex-Vodafone trading at 6.2x calendar 2014E EBITDA.

Citi analysts retained their Buy rating on Vodafone Group Plc (NASDAQ:VOD) (LON:VOD) with an enhanced target price of 260p from 235p ex 11p in dividend.