Determining the “Right Price”

Abdel Chernet

Student thesis: Master thesis


Background: The home market of Vodafone, one of the largest telecommunication companies in the world, has drastically changed within the last few months with two major acquisitions being announced. BT has acquired EE and has thus created a market leading telecom operator with a strong presence in mobile, television, fixed voice and broadband. Simultaneously, O2 and Three have merged and established a new dominant force in the mobile space. To avoid being left behind in their largest market, Vodafone needs to react. The most obvious acquisition target is Virgin Media, who combined with Vodafone would create a strong quadruple play alternative to BT/EE, given with their strong presence in the cable market. Question: What maximum price should Vodafone pay to acquire Virgin Media given the value of the company and the potential synergies as of 1st of May 2015? Method: The maximum acquisition price Vodafone should pay is determined based on the intrinsic standalone value of Virgin Media and the value of the synergies of combining the two firms. First, a strategic analysis was conducted to evaluate the business outlook of Virgin Media through a macroeconomic-, industry-, and company specific analysis. Then, a financial analysis on the profitability, growth and credit risk was created to assess the key value drivers of Virgin Media. Based on the strategic and financial analysis the intrinsic value was calculated through an enterprise discounted cash flow model supported by a relative valuation. Finally, the synergies were divided into operational and financial synergies, and were estimated based on the strategic, financial and valuation analysis. Findings: The intrinsic enterprise value of Virgin Media was estimated to £16,259 million as of the 1st of May 2015. The key driver for the enterprise value was consumers increased demand for faster broadband services and bundled packages. However, the emergence of new Internet based services is also severely impacting the long-term profitability of the telecommunication sector. By incorporating the values of synergies the maximum acquisition price is found to be £24,979 million as of 1st of May 2015, which suggests a maximum acquisition premium of 51.1%. The key synergy drivers are operational synergies through cost savings and improved churn. Further, substantial financial synergies are possible through tax savings.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages109