In one of the FIN101 sections this week we discussed targets and acquirers. I said the acquirer’s stock price tends to drop and the target’s stock price tends to rise. This recent article in the New York Times makes a similar comment:
“Verizon shares are about the same as they were before rumors of the deal surfaced last week, even though the share price of the acquiring company usually drops.” [emphasis added]
Let’s look at the math of the acquisition. If Vodafone’s 45% stake is worth $130B then Verizon’s total value is $130B/0.45 = 289B. That is $159B for Verizon’s 55% and $130B for Vodafone’s 45%. The NYT article suggests the Enterprise Value is $176B, but that number does not include Minority Interest (which is 52.376B as of the 2013.12.31 balance sheet). So let me calculate what Vodafone is worth:
Enterprise value = Market cap + debt + minority interest + preferred stock – cash and cash equivalents
= 132.61B + 47.618B + 52.376 + 0 – 3.093B = 229.503B
Therefore Vodafone’s 45% is: 0.45*229.503B = 103.28B
So why is Verizon overpaying by roughly 30 billion dollars? Who knows? Perhaps some of the board members, executives, or large shareholders of Verizon are also shareholders of Vodafone. Good for those folks, but not for the remaining shareholders.
If you factor in VZ’s current P/E (84.87) and P/B (3.92) that enterprise value of 229.503 seems inflated. So apparently the offer for Vodafone’s interest includes a mix of the overpriced stock and cash. Maybe it is a fair deal…