Cash cow Vodacom pays 92% of HEPS in dividends, yielding 6.4% on share price

vodacomVodacom’s financial results for the year to end March, released on SENS this morning, reflect the price war which has erupted in South Africa’s cell phone sector. The better than expected numbers also justify late confidence which emerged in the market on Friday when Vodacom’s shares gained almost R3 from their lowest point to close at R129 (see graph of the day’s price movement on the right). At this price level the group is worth R191bn – the 12th most valuable company listed on the JSE. Vodacom today disclosed the price received per MB of data fell 25% in the year while the Regulator’s slashing of the Mobile Termination Rate had an immediate impact, cutting its average charge per minute to prepaid customers by 23% to 55c. Despite this fall in price, higher volumes and an expanding customer base resulted in single digit revenue growth and a slight improvement in the bottom line. With EBITDA profit margins still a healthy 36%, the company continues to generate the highest returns of any Vodaphone subsidiary globally. In a separate announcement on SENS Vodacom disclosed it has concluded the takeover of Tata-owned Neotel for R7bn in an all cash deal (see Press Statement below). A reflection of Vodacom’s cash generative ability is that despite this commitment, it is paying a dividend of 825c for the year – 92% of headline earnings – delivering shareholders a yield of 6.4% at the current share price.  – AH

Vodacom: Highlights of the year to end March 2014

* R10 779 million in capital investments supporting 27% increase in voice traffic and 94% rise in data volumes.

* Group active customers increased 13.8% to 57.5 million; 7 million net new connections in the year.

* Group revenue up 8.3% and service revenue up 4.7%; full year service revenue in SA returned to growth.

* Group data revenue grew 32.7% driven by bundle sales and integrated price plans.

* Group EBITDA up 8.2% (5.1%*) with a margin of 36.1%.

* Free cash flows grew 8.6% despite significant network expansion and investment in working capital.

* Headline earnings per share of 896 cents, up 2.8%; impacted by R310 million non-cash charge resulting from the modification of the terms of the Broad-based black economic empowerment scheme.

* Final dividend per share of 430 cents, giving total dividend per share of 825 cents.

 

Vodacom Press Release on Neotel acquisition:

Further to the SENS announcement on 30 September 2013, Vodacom has reached an agreement with the shareholders of Neotel Proprietary Limited (“Neotel” or the “Company”) to acquire 100% of the issued share capital in, and shareholder loans against, Neotel for a total cash consideration equivalent to an enterprise value of R7.0bn.

Principal benefits of the transaction

Leading fixed telecommunications network

Neotel, which started operations in 2007, is the second largest provider of fixed telecommunications services for both businesses (commonly referred to as enterprise services) and consumers in South Africa. The company has access to over 15,000 km of fibre-optic cable, including 8,000 km of metro fibre in Johannesburg, Cape Town and Durban. Neotel also has access to 2 x 12 MHz of 1800 MHz spectrum, 2 x 5 MHz of 800 MHz spectrum and 2 x 28 MHz of 3.5 GHz spectrum.

Acceleration of Vodacom’s unified communications strategy

Neotel will become a subsidiary of Vodacom South Africa and the combination with Vodacom’s South African fixed enterprise business will create a national service provider with annual revenues of more than R5bn.

Vodacom sees a significant opportunity to accelerate growth in unified communications products and services by integrating its extensive distribution and marketing capabilities with Neotel’s fixed network and product capabilities. The combined entity will be able to offer an expanded and enhanced range of converged services (e.g. hosted PBX, OneNet) to enterprise customers. Vodacom estimates revenue synergies with a total net present value of approximately R0.9bn after integration costs.

Enhancement of next generation network capabilities in South Africa

The combination of Neotel’s and Vodacom’s networks will improve overall network availability and reduce the cost to serve customers. The combined business will also be ideally positioned to accelerate broadband connectivity in line with the South African Government’s broadband targets, enabling Vodacom to take a leading position in the fibre to the home and fibre to the enterprise segments of the market.

The combined entity will also be able to use the radio spectrum currently assigned to Neotel more effectively. This spectrum will enable Vodacom to accelerate the roll-out of LTE (commonly referred to as 4G) services, providing high speed, high quality wireless connectivity to a greater proportion of the South African population.

In-market consolidation with substantial cost and capex savings

Vodacom expects to achieve substantial cost and capex synergies with an annual run-rate of approximately R300m before integration costs in the full fifth year post completion, equivalent to a net present value of approximately R1.5bn after integration costs. These savings will primarily be derived from the joint utilisation of Neotel’s extensive fibre network and the elimination of overlapping elements, joint procurement and the combination of overlapping administrative functions. The transaction values Neotel at a multiple of 8.8x annualised 1H2014 OpFCF, adjusted for cost and capex synergies[1].

Neotel management and employees

Vodacom looks forward to welcoming Neotel’s employees. Their fixed and enterprise skills will enable the combined entity to deliver enhanced and extended service offers.

Additional information on the transaction

Vodacom will fund the acquisition through available cash resources and existing credit facilities.

The transaction remains subject to the fulfilment of a number of conditions precedent including applicable regulatory approvals and is expected to close before the end of the financial year.

Speaking about the transaction, Vodacom Group CEO Shameel Joosub said:

“Through the combination of these two businesses, the provision of a wider range of business services and much needed consumer services like fibre-to-the-business and fibre-to-the-home becomes a concrete reality – it will be good for the consumer, good for business and good for the country.  And for our investors, the transaction fits perfectly within the priorities of Vodacom’s growth strategy focused on continuing our investment in data and our Enterprise business.”

 

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