Vodafone Corporate Valuation and Financial Policy - Example

Corporate Valuation Name Tutor Unit Code Date Vodafone Profile Vodafone Group PLC is a multinational mobile telecommunications company. The Company stated as a subsidiary of Racal Electronics in 1984 but later became an independent full-fledged company in 1991. Since then the company has expanded through acquisitions and mergers to become the third largest mobile telecom company in the world by total revenues and the number of subscribers. Despite the various challenges and competition in the telecommunications industry, Vodafone has shown strong resilience. Today, the company operates in over 60 countries spread across Europe, the United States, Africa, Asia Pacific and the Middle East. Overseas operations are mainly carried out through its subsidiaries, associates (such as Bharti Airtel, Safaricom,), and investments. The headquarters are based in Newbury Berkshire, United Kingdom (Vodafone, 2014). Vodafone provides some of the best products and services on earth that include voice, messaging, fixed line and data. Through its business associate in Kenya, Safaricom, Vodafone provides the revolutionary money transfer service, M-Pesa. M-Pesa is a mobile phone platform through which people in emerging markets send and receive money. Other products include branded devices, international money transfer, salary disbursements, savings and loans, and insurance products in different markets. Mobile Telecommunications Industry The global mobile telecommunications industry continues to grow from strength to strength across the different technologies, products and services. As at 2014, there were a total of 7.1 billion mobile phone subscribers in the world. The total revenue generated by service provides is around $960 billion every year. Demand for mobile services has increased by over 9 per cent in the past 5 years. Mobile penetration stands at around 98 per cent from 69 per cent in 2009 (Vodafone Annual Report, 2014). Still, there are lots of emerging opportunities as governments, enterprises and other consumers adopt mobile digitalisation technologies. Consumers are more obsessed with their mobile devices. According to the Global Mobile Consumer Survey, over 90 per cent on smartphone owners check their phones in the first one hour after waking up. Over 25 per cent of the consumers check their smartphones for more than 50 times in a single day. Also, there have been positive market trends in fixed broadband, mobile broadband, big data, and cloud computing. This has propelled stronger growth of telecom firms. For instance, with the development of 4G, mobile broadband is expected to generate much revenue as it is better placed to meet the budding business and consumer demands. Developments in the industry have led to increased competitiveness. Firms are working hard to build their operations so as to boost the value provided to customers. Mobile telecom firms are forming partnerships through strategic alliances through which to offer value-added combined services. Nonetheless, there are many options of services providers can offer to customers. Verizon, AT&T and T-Mobile remain to be the predominant players in the telecommunications industry. China and India account for majority of the mobile customers (over 74 per cent) due to their huge populations, followed by Europe. Emerging markets contribute more to the growth in the industry than mature markets. Besides, the industry is one of the highly regulated. This has a significant impact on the collected revenues. Corporate Valuation Theory Firm value is a great decision making factor in the minds of financiers and investors. Despite the pervasiveness of valuation, the methods of arriving at the firm value differs greatly among different individuals. The difference can be attributed to the varying valuation models or different assumptions made in estimating model parameters. The valuation exercise is also not easy since many factors need to be considered. The valuation models are broadly grouped into direct (absolute) and indirect (relative) valuation methods (Bazley & Hancock, 2010). Direct valuation gives a direct estimate of a firm’s fundamental value. On the other hand, indirect valuation gives an indication as to whether the firm is fairly priced based on some peer group or benchmark. The direct methods entail the discounted cash flow (DCF), option-pricing, and economic income (EVA). Indirect methods include the price-to-sales ratio, price-to-cash flow ratio, price-to-book ratio, EV/sales multiple, and price-to-earnings ratio, among others (Bancel & Mittoo, 2015). Analysis In this section different corporate valuation models are used to estimate the value of Vodafone in comparison to T-Mobile and AT&T. T-Mobile and AT&T are leading companies in the mobile telecommunications industry and, therefore, form a good basis for comparison. The analysis is based on free cash flow (FCF), return on invested capital (ROIC), economic value added (EVA) and market value added (MVA) valuation models. Table 1: Corporate Valuation for Vodafone, T-Mobile and AT&T in 2013 Vodafone T-Mobile AT&T EBIT 7,661,000 1,274,000 31,717,000 Interest Expense 2,716,000 1,223,000 3,940,000 Income before tax 4,945,000 51,000 27,777,000 Income tax rate 55% 2398% 14% NOPAT 3,453,259.66 -29277019.61 27218134.75 Total Current Asset 35,377,000 12,228,000 23,196,000 Total Current Liabilities 47,435,000 5,808,000 34,995,000 Working Capital -12,058,000 6,420,000 -11,799,000 Property Plant and Equipment 30,886,000 15,349,000 110,968,000 operating capital 18,828,000 21,769,000 99,169,000 NIOC 7,211,000 -316,000 8,475,000 FCF -3,757,740.34 -28,961,020 18,743,135 ROIC 18% -134% 27% EVA 1,570,459.66 -31453919.61 17301234.75 Common stock 5,873,000 6,495,000 No. shares (Face value @10$) 587300 814.88 649500 Current market price 33.84 40.7 32.64 stockholder equity 108,586,000 14,245,000 90,988,000 Market value of the stock 19,874,232.00 33165.616 21,199,680.00 MVA -88,711,768.00 14,211,834 -69,788,320.00 Free cash flow (FCF) valuation model is based on the company’s free cash flows that are then discounted at the weighted average cost of capital (WACC). The free cash flows include cash flows from the company’s operations that can be paid to capital providers minus capital expenses needed for the company to run as a going concern (Deegan, 2009). From table 1 above, only AT&T posted positive free cash flow in 2013 amounting to $18, 743,135. Vodafone and T-Mobile posted negative cash flows of -$3,757,740 and -$28,961,020 respectively. This indicates that the companies were not able to generate enough cash flow to pay their capital providers. They also may have spent more money on capital investments in that year. Return on invested capital (ROIC) is an important valuation measure. The measure assesses the financial health and quality of a company. AT&T had a ROIC of 27 per cent compared to Vodafone’s 18 per cent and T-Mobile’s -134 per cent. This shows that Vodafone performed relatively well pointing to a good health and quality of the company. T-Mobile’s performance is worse and the company needs to match the industry peers by improving their financial health and quality. Economic value added (EVA) is the difference between the company's net operating profit after tax and a part of the total capital invested in the business. EVA generally indicates the profitability of the company based on the projects undertaken (Jackling et al., 2010). From table 1 above, AT&T also reported the highest EVA of $17,301,234. Vodafone had an EVA of $1,570,459, while T-Mobile had an EVA of -$31,453,919. This indicates that Vodafone generated some profits from capital projects undertaken during the year, same as AT&T, which performed far much better. T-Mobile’s EVA is negative indicating that the projects invested in were not profitable. Market value added (MVA) represents the entire value of a company in an open market. It is the whole sum of the capital claims held against the company, market value of equity and market value of debt. Higher MVA denotes higher valuation. MVA is used to assess the management ability. If the MVA is negative, then the investments and actions undertaken by the management falls short of the value of capital contributed by capital providers (Jackling et al., 2010). Vodafone and AT&T had negative MVA; -$69,788,320 and -$88,711,768. This result is contrary to the other valuation measures. However, it indicates that the companies’ use of capital resources did not generate a value that would exceed the value of capital contributed by capital providers. T-Mobile posted $14,211,834 in market value added pointing to generation of higher value from capital provided. From the above analysis, it is evident that Vodafone is not generating adequate revenue from the projects it is putting capital funds. I suggest that the company management look into the criteria used to select project and develop a strategy along the projects to be considered. This will produce an overall change in the company and provide new direction that will boost the company’s valuation. Conclusion Vodafone is a leading company in the global mobile telecommunications industry. The industry has grown form strength to strength and is expected to continue growing. There are numerous methods that can be used to compute the value of a company; broadly categorised into obsolete valuation and relative valuation. The 2013 analysis reveals that, by and larger, AT&T performed better compared to Vodafone and T-Mobile. This shows that AT&T has more market value than Vodafone and T-Mobile. References Bancel, F. and Mittoo, U. (2015). The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts. Journal of Applied Corporate Finance, 26 (4): 106-117. Bazley, M. and Hancock, P. (2010). Contemporary Accounting, 7th Ed. Cengage Learning. Deegan, C. (2009). Financial accounting theory, 3rd Ed. McGraw-Hill, North Ryde. Jackling, B. Raar, J. and McDowall, T. (2010). Accounting: A Framework for Decision Making, 3rd edn, McGraw-Hill. Vodafone, (2014). Background and History, retrieved 9 October 2015, . Vodafone Annual Report, (2014). 2014 Annual Report, retrieved 10 October 2015, . Read More