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Valuation of Vodafone Group, 20 May 2014

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Valuation of Vodafone Group, 20 May 2014 COPENHAGEN BUSINESS SCHOOL 2014 ________________________________________________________________________________ Valuation of Vodafone Group, 20 May 2014 Thomas Klauer Finance and Strategic Management ________________________________________________________________________________ Master’s Thesis Thesis supervisor: M.Sc. in Economics and Business Administration Peter Staudt Hand-in date: 29-12-2014 Number of pages: 80/80 Number of characters incl. spaces: 180,594/182,000 Abstract This thesis answers the main research question: “What are the enterprise value and the fundamental share value of Vodafone Group as of May 20th, 2014?“ By using Monte Carlo simulations to estimate these values, the single enterprise value with the highest likelihood is found to be GBP 87.5bn, while the mean of the total probability distribution is calculated as GBP 94.1bn. Accordingly, the most likely fundamental share value is estimated to be GBP 2.23 with a mean value of GBP 2.48. In order to answer the main research question, the present thesis follows a structure guided by the following research sub-questions: Which strategic factors, both on macro and micro level, are relevant to Vodafone, and how do they affect the valuation of the company? What are Vodafone‟s sustainable competitive advantages? How has Vodafone been performing financially in the recent years? How is Vodafone expected to perform in the future? By applying the PEST analysis and Porter‟s Five Forces analysis, the firm‟s business environment is analyzed in detail, finding that the rapid increase in demand for data services and the development of new technologies are amongst the biggest opportunities for Vodafone, while regulatory pressures, the strong competition, and the market saturation comprise its main threats. A strategic analysis of Vodafone‟s resources and capabilities is conducted, using the VRIO framework. The group‟s global footprint, its superior network (infrastructure), and its strong brand are identified as sustainable competitive advantages. Following the DuPont-Model, Vodafone‟s past financial statements are reformulated to distinguish operating from financing activities, are adjusted, and are analyzed as well as compared with peers. This allows to project the company‟s performance into the future, with an explicit forecasting period of five years followed by a terminal period. Based on these forecasts, the adjusted present value model is used in combination with Monte Carlo simulations in order to estimate firm and share value. A sensitivity analysis is performed, so as to critically assess the valuation. Lastly, the results are tested against other network operators using comparative multiples, finding that the values found reflect a representative assessment of Vodafone‟s value and its share value as of May 20th, 2014. ii Table of Contents 1. Introduction .................................................................................................................................. 1 2. Problem Definition ....................................................................................................................... 1 2.1 Thesis Structure .................................................................................................................... 2 2.2 Delimitations ......................................................................................................................... 3 3. Methodology .................................................................................................................................. 4 3.1 Methodology of the Strategic Analysis ................................................................................. 4 3.2 Valuation Method ................................................................................................................. 6 4. Presentation of Vodafone Group .................................................................................................. 7 4.1 Historical Overview .............................................................................................................. 7 4.2 The Verizon Deal .................................................................................................................. 9 4.3 Vodafone Today .................................................................................................................... 9 4.3.1 Vodafone‟s Products and Markets ............................................................................ 10 4.3.2 Corporate Governance ............................................................................................. 10 5. Analysis of Vodafone and Its Business Environment .............................................................. 11 5.1 Strategic Analysis of Macro-Environment ......................................................................... 11 5.1.1 Political .................................................................................................................... 12 5.1.2 Economic ................................................................................................................. 14 5.1.3 Social ........................................................................................................................ 17 5.1.4 Technological ........................................................................................................... 21 5.2 Strategic Analysis of Wireless Telecommunications Industry ........................................... 24 5.2.1 Buyers ...................................................................................................................... 24 5.2.2 Suppliers ................................................................................................................... 25 5.2.3 New Entrants ............................................................................................................ 26 5.2.4 Threat of Substitutes ................................................................................................ 27 5.2.5 Degree of Rivalry ..................................................................................................... 28 5.3 Strategic Analysis of Vodafone ........................................................................................... 30 5.3.1 Strategic Analysis of Vodafone‟s Sustainable Competitive Advantages ................. 30 5.3.2 SWOT Analysis ....................................................................................................... 38 5.4 Sub-Conclusion ................................................................................................................... 41 6. Financial Analysis of Vodafone ................................................................................................. 42 6.1 Vodafone‟s Peer Group ....................................................................................................... 42 6.2 Accounting Policies ............................................................................................................ 43 6.3 Preparation of the Analytical Financial Statements ............................................................ 44 6.3.1 Analytical Balance Sheet ......................................................................................... 44 iii 6.3.2 Analytical Income Statement ................................................................................... 46 6.4 Profitability Analysis .......................................................................................................... 47 6.4.1 Return on Invested Capital ....................................................................................... 48 6.4.2 Return on Equity ...................................................................................................... 51 6.5 Sub-Conclusion ................................................................................................................... 53 7. Forecasting .................................................................................................................................. 54 7.1 Pro Forma Income Statement ............................................................................................. 55 7.1.1 Revenues .................................................................................................................. 55 7.1.2 Cost of Sales and Other Income Drivers .................................................................. 58 7.1.3 Impairment ............................................................................................................... 58 7.1.4 Tax ........................................................................................................................... 58 7.1.5 Non-Operating Items ................................................................................................ 59 7.2 Pro Forma Balance Sheet .................................................................................................... 59 7.2.1 Investment Drivers ................................................................................................... 60 7.2.2 Working Capital ....................................................................................................... 60 7.2.3 Financing Drivers ..................................................................................................... 61 7.3 Pro Forma Cash Flow Statement ........................................................................................ 61 7.4 Sub-Conclusion ..................................................................................................................
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