AVodafone bid for US partner Verizon Communica-tions may or may
not be in the cards. But increasingly strong US utes are proving ever more
difficult for cash-rich and regulation-wary European giants to resist.
Ironically, as those would-be acquirers get set to feast on US utilities,
they’re also great buys for American investors. Foreign utes best their US
counterparts in a comparison of profitability to market prices.
Not every foreign utility has paid off recently. Venezuela, for example, forced
small investors to accept an inferior price for national telecom CANTV, once it
had cashed out Verizon.
New Zealand regulators are breaking up Telecom New Zealand. Europe’s
chief utility bureaucrat is Vivianne Redding, who’s hell-bent on manufacturing
competition by tying the hands of incumbents.
Nonetheless, the best foreign utes will continue to meet and beat the impressive
returns they’ve handed American investors the past several years.
Keeping Trusts
On Halloween night 2006, Canada’s minority Conservative Party government
announced it would begin taxing Canadian income trusts as corporations beginning
in 2011. Following the initial sell-off, trusts backed by good businesses have
staged a remarkable recovery.
Takeover interest, primarily from private capital, has undeniably been the
spark. But it’s also increasingly clear that most trusts’ burdens will be closer
to the 6.7 percent effective tax rate paid by the typical Canadian corporation
than the official 31.5 percent rate. As a result, many will have the wherewithal
to continue paying big dividends well past 2011.
Like US rural telecoms, Bell Aliant Regional Communications Income Fund
reaps steady, high cash flows by up-selling its basic customers to broadband
service faster than it loses them to competition. That’s a formula for high
dividends and modest growth to 2011 and beyond.
The trust is 44 percent owned by former parent BCE, which has accepted a
takeover offer from the Ontario Teachers’ Pension Plan Board and a private
capital consortium. This raises the possibility that its Bell Aliant interest
could be sold in early 2008 when the deal is completed. BCE’s new owners are
certain to preserve Bell’s market value and could actually launch a high-premium
takeover for the other 56 percent.
Breaking Down Borders
Utility empire builders always face a chorus of skeptics. But as the
fortyfold rise in shares of Spain’s Telefonica since the late 1980s
proves, there are few better investments than those that succeed.
Over the past decade, the company’s spent some $138 billion on expansion. Today,
roughly a third of revenue comes from its home market in Spain, a third is
earned by wireless operations elsewhere in Europe and the rest is from
high-growth properties in Latin America. Telefonica’s 22-country operation
generates some of the industry’s fattest profit margins, allowing the company to
simultaneously slash debt and pursue growth. Recent deals include the purchase
of a 10 percent stake in China Netcom and an ownership stake in
Telecom Italia.
Despite some recent share gains, Telefonica is still relatively cheap. A
management-imposed moratorium on new deals expires at the end of 2007. But given
the company’s stellar track record, which spans several management teams, I’m
betting on the obvious: more successes.
Spanish power ute Iberdrola became the world’s leading wind power
producer by buying Scottish Power. It’s now taking its act to the US with
an offer to buy New England/New York transmission and distribution utility
EnergyEast. And it plans to dramatically expand its marketleading wind power
presence in Europe, where demand is projected to double by 2015.
“Buy the target, sell the acquirer” is a Wall Street strategy that’s followed
reflexively, though it makes no sense for long-term investors. As a result,
Iberdrola’s successful dealing has left it a cheap stock, ripe for a nearterm
lift from an upcoming offering of a portion of its wind operations.
In little more than a decade, Vodafone has amassed a wireless empire serving
more than 200 million customers on six continents. And it’s still growing
rapidly, adding customers in India at a 60 percent-plus annualized rate in June
alone.
The stock sells for just 1.29 times book value, barely a quarter of Telefonica
and a sixth the level of troubled Telecom New Zealand because of continued
uncertainty about its 45 percent stake in Verizon Wireless. The company’s
also rumored to be considering an outright takeover of Verizon.
This is all speculation for those of us lacking a seat on Vodafone’s board.
What’s certain is this is a high-value company that’s still dirt cheap despite
recent gains. Vodafone is a buy up to 35.
