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Vodafone unlikely to overpay for Liberty Global assets or cut dividend, says Numis

Numis left its rating on Vodafone at ‘buy’ but cut its target price to 255p from 270p
Numis says risks that Vodafone will issue new shares or cut its dividend are 'very low'

Vodafone Group PLC (LON:VOD) is negotiating on the possible acquisition of Liberty Global's assets from a position of strength so is unlikely to overpay, Numis said.

In February, Vodafone announced that it was in early stage talks to buy some of Liberty’s European assets.

Numis said in a note to investors on Friday that Vodafone is in a good position to negotiate because it now has some “sizeable” assets of its own in Europe and “sensibly priced” wholesale access to third-party fixed-line networks.

The broker also believes Liberty is showing “much more humility” than it did a year ago as the company is convinced that fixed line and mobile convergence is a certainty but does not work for cable networks that reach only a small proportion of each market.

Risk Vodafone will cut dividend 'very low', says Numis

“In Germany, Liberty's asset reaches just c.30% of all properties so we think Liberty believes it has to exit sooner rather than later, no matter how well this asset is growing currently,” Numis said.

“As a result of all the preceding points, we believe Vodafone will not overpay for Liberty’s asset in Germany (we think more than 10 times EBITDA is fair) and Vodafone will not have to also buy Liberty out of the Dutch market.

“In turn, risks that Vodafone will issue new shares or cut its dividend per shares are very low.”

Shares rose 1.5% to 209.90 in late morning trading.

Numis remains bullish but cuts target price

Numis left its rating on the stock at ‘buy’ but cut its target price to 255p from 270p due to “numerous individually small reasons” such as higher estimates for spectrum costs.

“Our target price reflects our view that the stock should trade at a small EV/EBITDA premium to the out-of-favour sector rather than a small discount currently - relative to some listed telecom companies, we believe VOD is better managed and gaining more control of its destiny faster,” Numis said.

Vodafone was among the successful bidders in Ofcom’s 4G and 5G airwave spectrum auction earlier this month.  It won 50 MHz of the 3.4 GHz spectrum that is earmarked for 5G at a cost of £378.24mln.

Ahead of Vodafone’s full year results on May 15, Numis downgraded its underlying earnings (EBITDA) forecasts by 1-2%.

India the 'only real problem asset' for Vodafone

Numis, however, believes market reaction to revenue key performance indicators in the third quarter was “over the top”.

READ: Vodafone's quarterly revenue drops on impact of Dutch unit sale and forex

Regarding sales prospects in Europe, Numis thinks regulatory cuts to mobile prices are now immaterial and Vodafone keeps growing in fixed line.

On the competition the company faces from new Italy mobile entrant Iliad, Numis reckons “many overestimate Iliad and underestimate Vodafone”.

Numis said the only real problem asset in the Europe and Africa, Middle East and Asia Pacific region its India subsidiary, which has been weighed down by tough competition.

However, Vodafone is close to completing the merger of the India unit with Idea Cellular and thus initiating a major self-help programme, the broker added.

“Also, India now has two-thirds of fewer mobile network operators and just three large players remain,” Numis said. 

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