Vodafone (VOD) is one of the largest wireless phone companies in the world, with 419.4 million proportionate customers. It has networks across the world. Where it doesn't have its own operations, it has formed strategic partnerships.
Its large network, especially in Europe – where it has 122 million subscribers – allows it to keep the majority of its clients' calls on its own network, reducing roaming charges, which lowers costs to subscribers and increases profits for the firm. The lower roaming charges encourage new subscribers to join its network. Its scale also gives it some advantage over competitors, allowing it to source equipment at lower prices.
The firm can develop a product in one country and roll it out to others at minimal additional expense. In addition, many countries are selling additional spectrum. Thanks to Vodafone's scale, it can afford to bid for more spectrum, which improves the quality of its network, thereby attracting more valuable heavy data users. With the sale of its stake in Verizon Wireless complete, the firm plans to speed up its network expansion plans. We think many of its competitors will struggle to follow suit, given their poor balance sheets.
Thus, the improved networks should strengthen Vodafone's moat. Likewise, the recently completed purchase of Kabel Deutschland adds to Vodafone's network strength in Germany, particularly among retail customers. The firm has done a great job of using these advantages to enter new markets. Its scale advantages result in a narrow economic moat, in our opinion.
Vodafone's sale of its stake in Verizon Wireless essentially ends its streamlining phase. The purchase of Kabel Deutschland, the largest cable television provider in Germany, is the largest of several acquisitions designed to help the firm grow again. As convergence among fixed-line telecom, broadband, television, and to a lesser extent wireless telephony increases, Vodafone is heightening its exposure outside wireless.
While we think the firm overpaid for Kabel Deutschland, the deal makes a lot of strategic sense, as it will allow Vodafone to carry its own backhaul traffic, avoiding Deutsche Telekom's fees. It also continues Vodafone's expansion into adding fixed-line, broadband, and pay television capabilities to its wireless service. Such acquisitions picked up in 2012 with the purchase of Cable & Wireless Worldwide in the U.K. and TelstraClear in New Zealand.
However, those transactions were made at low multiples, unlike Kabel Deutschland's. We are somewhat concerned that the firm could go on another buying spree, as it has now entered exclusive talks to buy Neotel in South Africa. Its historical record of such purchases is poor. That said, we think its existing assets and announced rollout of fibre in some countries should provide it with the networks it needs to compete in an increasingly converged telecom world.
Vodafone continues to struggle in Southern Europe, and we expect weakness will reign for several more years there. However, Northern and Central Europe is holding up better and should begin to benefit in calendar 2014 from most mobile termination rate cuts ending in 2013. The firm is seeing growth in much of its emerging-market portfolio, and important, India is showing improvement, particularly in its margins. We think India holds the most promise to outperform our estimates and provide upside to our fair value estimate.
