Funds weigh up Vodafone windfall

Equity income managers were last week weighing up a potential windfall from Vodafone’s sale of its 45 per cent stake in US telecoms giant Verizon.

The two companies last week announced a deal worth $130bn (£83.2bn), more than two-thirds of which will be paid out to investors. When completed the deal is expected to shrink Vodafone’s market capitalisation by up to half.

Vodafone shareholders – including many of the UK’s biggest equity and equity income funds – will share in a cash windfall of $23.9bn and $60.1bn worth of shares in Verizon.

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Simon Murphy, who runs the £293.6m Old Mutual UK Equity fund, has a 4.2 per cent holding in Vodafone and said the UK stockmarket “had not appreciated the value created by Verizon”. He described the $130bn cost as “an absolute steal” and tipped Vodafone to shift its focus to acquisitions in Europe. “We’re still quite interested in the rump of Vodafone; it is more attractive than people think,” Mr Murphy said.

“It is exposed to Europe, which has been a horrible market but there are signs that things are getting a little bit better. It has got the money to buy companies in Italy or Spain, for example. Its dividend yield may have more capacity to grow in the future.”

Stephen Bailey, co-manager of the £324m Liontrust Macro Equity Income fund, also backed Vodafone to be a buying company in the coming years, adding that the firm’s management had achieved a “fabulous” price for its Verizon stake.

“It removes a lot of uncertainty and gives an opportunity to restructure,” Mr Bailey said.

“I think we will see more acquisitions in Europe as we’re starting to see the first signs of recovery there. Telecoms companies in Europe are beset with exceptionally high levels of debt, so there are good opportunities for a cash-rich company.”

Colin Morton, manager of the £147m Franklin UK Equity Income fund, argued that Vodafone may itself be a target for a bid from a rival company following the deal.

The manager said: “The question for us is what to do with the cash. Do we look to buy other companies or reinvest in Vodafone?

“Its current plan is to pay out enough to yield 5 per cent but it has lost the growth part of its business. The other parts haven’t performed so well in the past few years.”

Both Mr Morton and Mr Murphy said they were unlikely to hold on to the Verizon shares, but Mr Bailey said he and co-manager Jan Luthman already held a small position in the US company as part of a 16 per cent weighting to non-UK stocks.

In contrast Ben Fitchew, co-manager of Ardevora’s UK and global funds, said that even following the sale of its Verizon stake Vodafone was not a suitable stock to invest in, as its management was not low-risk enough to meet the managers’ investment criteria.