Its always a sad day when a company ceases trading and people lose their jobs. However, Phones 4U going into administration could present an opportunity for Vodafone (LSE: VOD) to buy part or all of the business, with the company apparently confirming that it has been in contact with administrators. With Vodafone struggling to deliver growth in the short term, a deal could be good news for investors in the stock. Heres why.
A Lack Of Growth
For starters, Vodafone needs to stimulate its bottom line. Although its strategy of buying undervalued European assets such as Kabel Deutschland and Spains Ono appears to be a sound long-term strategy, the Eurozone continues to post only anaemic levels of GDP growth. This means that Vodafones focus on Europe, while having vast potential in the long run, is holding the company back. With the UK economy far more buoyant than its European counterpart (and forecast to grow at a pace that is among the highest of the developed nations), increasing its exposure to the UK via Phones 4U could be good news for Vodafone.
The Right Locations
As has been stated by Phones 4U, it was a significantly profitable business. The problem was that it ran out of suppliers. So, taking over a retailer that has been successful should mean that Vodafone (if it does take over part or all of Phones 4U) gains an enviable store footprint with a number of lucrative locations. This could allow the company to increase sales in the long run and provide it with an improved bottom line.
Finances
When it comes to financial firepower, Vodafone scores very highly. Historically, it runs only moderate financial leverage and, due to its sheer size and scale, is able to borrow at very favourable rates. This means that the assets of Phones 4U are well within its comfort zone and that it should be able to move quickly, were it to pursue purchase.
Furthermore, a purchase of Phones 4U would also fit in with the companys stated ambition to engage in M&A activity moving forward. Certainly, it would be a much smaller buy than Vodafone is capable of, but a series of smaller acquisitions could prove to be just as effective as a small number of larger purchases in time.
Looking Ahead
As mentioned, Vodafones focus on the Eurozone could be hugely beneficial in the long run. However, with growth continuing to stall, the companys bottom line is suffering in the short run. Thats why acquisitions in faster growing markets (such as the UK) could prove vital, with Phones 4U seemingly a straightforward means of increasing Vodafones store footprint (and, potentially, its top and bottom lines) over the short to medium term.
With shares in Vodafone yielding 5.6%, it remains an attractive income play. The purchase of part or all of Phones 4U could potentially help it to become a better growth play, too.
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Peter Stephens has no position in any shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
