COMMENT: Wake up Vodafone!

Thu Jan 30, 2014 12:11pm EST

LONDON, Jan 30 (IFR) - Time is ticking for Vodafone. The company might be the world's third largest mobile telecommunications company and a bellwether for the global industry but it is not immune to the impact of rising interest rates and has to act now if it wants to pocket cheap debt to fund an expansionary shopping spree.

Even if it is not eyeing anything close to the scale of Verizon's 2013 USD49bn funding fest, the FTSE 100 constituent would be shooting itself in the foot if it slumbered through the lowest funding cost era for years, only to wake up to the smell of rising interest rates and be served up a larger-than-necessary borrowing bill for breakfast.

As an acquirer, Vodafone ticks all the boxes.

A cash injection from the sale of its wireless business to Verizon Communications (that both entities approved just this week) will have bolstered its credit ratings, and what's more, Liberty Global - against whom Vodafone is tipped to have to compete if it decides to bid for Spanish cable operator Ono - is currently tied up with its own takeover of Ziggo.

Vodafone would be mistaken to wait until M&A markets are reignited properly, given that it could end up being stuck between a rock and a hard place whatever direction rates take.

If the Federal Reserve's tapering programme picks up momentum, Vodafone's cost of borrowing will rise from multi-year lows in sync with underlying interest rates.

On the flip side, if the Fed slows tapering, investors will increasingly favour lower rated, non-core credit, forcing Vodafone, with its A3/A- rating, to have to pay up anyway.

A slew of companies, including Bayer and Solvay, have shown how fierce investors' appetite is for debt raised for acquisitions, so Vodafone should put its foot down.

In November 2008, the group paid a weighty coupon of 8.125% on a 10-year sterling bond. A year later, it paid a 6.25% coupon on an even shorter seven-year euro bond.

Yes, those levels may be expensive relics of the past compared to the less than 2% coupon it would likely be able to pay on a seven-year euro bond today, but history has been known to repeat itself.

A potentially heftier price tag for being put on hold for a few months? Now, that would make Vodafone wish it had syndicate bankers on speed-dial.

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