BREAKINGVIEWS-Vodafone discount won't be erased by China exit

-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --

By Una Galani

LONDON, Sept 8 (Reuters Breakingviews) - Vodafone's (VOD.L) exit from China won't do much to close the discount on the telecoms group's shares. True, the disposal of the 3.2 percent stake in listed rival China Mobile (0941.HK) for roughly $6.6 bln is good housekeeping and shows that chief executive Vittorio Colao is keen to address investor criticism by trimming the sprawling portfolio of minority investments. But there is only one issue Vodafone must resolve if it wants to eliminate the discount and stop investor grumbling.

The shares trade at roughly 17 percent below Vodafone's sum-of-the-parts valuation, according to calculations by Reuters Breakingviews. On top of the core global business, Vodafone holds 40 percent of listed Kenyan operator Safaricom (SCOM.NR). Its unlisted minority holdings include a 4.4 percent stake in the parent of India's Bharti Airtel (BRTI.BO), a 44 percent stake in France's SFR [VIVSF.UL] and 45 percent of U.S. mobile joint venture Verizon Wireless.

Exiting China helped Vodafone to crystallise a reasonable 8 percent compound annual return on the 2000-2002 investment and is the first step to stripping the operator back to a core business focused on India, sub-Saharan Africa and Europe. It will be harder for Vodafone to dispose of the unlisted minorities where there is only one buyer. Bharti may have other priorities after spending $10.7 billion on assets in Africa. SFR partner Vivendi (VIV.PA) has shown appetite for a deal but may yet choose to prioritise investment in Brazil. Including the value of Vodafone's stake in Safaricom and a subordinated loan note worth 2.9 billion pounds in Japan's Softbank (9984.T), these minority investments are worth roughly 11 billion pounds -- just 13 percent of Vodafone's current market capitalisation.

Vodafone's discount will persist until the group finds a way of unlocking value from its Verizon Wireless stake, which has not paid a dividend since 2005. The shareholding dwarfs the size of the other non-core businesses and could be worth over 45 billion pounds, or over half Vodafone's market capitalisation, allowing for a slight premium to its fixed-line parent, Verizon Communications (VZ.N).

Short of taking a radical decision to spin off its stake in Verizon Wireless or try to buy out its partner, Vodafone's challenge is to tie up enough smaller loose ends -- and potentially even make easier disposals within its core business -- to keep investors at bay until 2011. That's when Verizon Communications has hinted the venture could resume dividend payments. China was the first, small step on a long journey.

CONTEXT NEWS

-- Vodafone has sold its entire 3.2 percent stake in China Mobile for roughly $6.6 billion, nearly double what the UK mobile operator paid for the investment almost a decade ago.

Vodafone announced on Sept.7 that it had agreed to sell the holding of 643 million shares via an accelerated book build offering handled by Goldman Sachs, Morgan Stanley and UBS.

Vodafone was selling at HK$79.20 per-share, or a 3.4 percent discount to the last closing price, according to Reuters.

China Mobile shares fell 4 percent to HK78.90 following the announcement.

-- Reuters news story [ID:nTOE686080]

-- Vodafone announcement: [ID:nRSH3184Sa]

-- For previous columns by the author, Reuters customers can click on [GALANI/] (Editing by Chris Hughes and Kevin Liffey)