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LONDON, Aug 26 (Reuters) - Vodafone VOD.L is likely to sell assets in Poland, China and eventually France as it starts a retreat from sprawling international expansion designed to appease investors who believe it needs more discipline.
Vodafone, the world’s largest telecom operator by revenue, has said it would reconsider its strategy following shareholder concerns, and a move to sell minority assets is seen more as a bid to improve sentiment than drive earnings.
Senior bankers said Vodafone was not under pressure to sell assets to shore up its balance sheet or improve cashflow.
“Investors are anxious about Vodafone’s deals that were done five to seven years ago,” a telecoms banker said. “The company has acquired a reputation as a poor transactor. They need to show investors that they are acting in a disciplined manner.”
RBS said that because many of the assets tipped for a sale contributed to earnings per share and free cash flow, their disposal would have little impact on those metrics on average.
Bankers and analysts believe Vodafone is likely to sell its near 25 percent holding in Poland’s top mobile telecoms firm Polkomtel [PTL.UL] as opposed to buying out the other owners. An initial public offering (IPO) is another option.
Its 3.2 percent holding in China Mobile 0941.HK is seen as an easier asset to sell, while the 44 percent holding in France's SFR is also likely to go eventually.
The review of strategy follows complaints from investors who believe Vodafone’s position of owning assets it does not control has produced a discount between the shares and sum of the parts.
The Ontario Teachers’ Pension Plan, which holds a 0.4 percent stake, recently accused the firm of having “significant structural and strategic weaknesses”. [ID:nLDE66L0T7]
A disposal of small minority stakes could raise well over 10 billion pounds ($15.57 billion) which could be used to pay off debt, any tax bills, buy spectrum and increase share buybacks.
“A logical approach (would) be the recycling of disposal proceeds into share repurchases given that Vodafone will likely find it hard to find M&A transactions that are more accretive than buying its own stock,” Arete analysts said.
POLAND FIRST TO GO?
Domestic shareholders in Polkomtel have hired advisers for a possible sale of their stakes, which could begin as early as September, investment bankers familiar with telecoms said.
“It would probably want to be part of a larger deal, with other shareholders selling too,” a second telecoms banker said.
Apart from Vodafone, state-controlled Polish companies together account for around 75 per cent of Polkomtel.
Poland’s largest power group PGE hired ING to advise it on the options, and PGE’s chief executive said that Vodafone had also expressed an interest in selling. Oil refiner PKN is working with Nomura and copper miner KGHM is advised by KPMG. [ID:nLDE65M1MD] Bankers said that private equity firms including TPG, Blackstone, Apex, CVC and EQT would look at the business.
When Danish telecoms group TDC sold its Polkomtel stake in 2008, the deal valued the company at 3.7 billion euros ($4.70 billion). “I don’t think the government would want to proceed with a sale for less than that valuation,” the second telecoms banker said.
However, Vodafone would need a larger divestment than Polkomtel to address concerns, and a sale of its holding in China Mobile would start to fall into this category.
A lock-up period preventing Vodafone from selling its stake recently ended and the value of the holding has more than doubled to around $7 billion since it bought the stake. [ID:nTOE67F03P]
Market speculation in China suggests that Vodafone would have to sell into the open market, or possibly on to one or more institutional investors. Vodafone has technology partnerships with the firm and it would not want to damage the relationship by any quick sale.
Another stake sale that would also signal Vodafone's seriousness in its approach is its holding in French mobile operator SFR, with partner Vivendi VIV.PA indicating it wants to take full control to give it a strong source of cash.
Deutsche Bank estimates that Vivendi has around 8.6 billion euros available to finance the deal without impacting its credit rating. According to a Paris-based banker who declined to be named, it had not yet hired an investment bank for the deal.
The major issue will be for the two sides to agree on a valuation. According to analysts, Vodafone in road shows with investors this spring signalled it would consider a sale at 6x earnings before interest, taxes, depreciation and amortization (EBITDA), whereas Vivendi is likely to push for a valuation of between 5-6x EBITDA.
They expect Vivendi could end up paying 7-8 billion euros for the stake.
Vodafone has said its core businesses were in Europe, Africa and India. It's U.S. unit of Verizon Wireless, which it owns with Verizon VZ.N, is often seen as a problem as Vodafone owns 45 percent and has not received a dividend for several years.
However it is, for the moment, more likely to hold on for a dividend than consider a sale.
In India, its joint venture partner Essar had put on hold plans for an IPO, sources told Reuters. [ID:nTOE67P06T] (Additional reporting by Doug Young, Denny Thomas and Pratish Narayanan; Editing by Sharon Lindores) ($1=.6423 Pound) ($1=.7874 Euro)
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