In early February, Vodafone confirmed it was in talks with Nasdaq-listed Liberty Global to buy part of its European operation. Just two years ago bid talks between the two companies fell apart, with Liberty chairman John Malone likening them to an attempt to get a banana out of a jar.
With the lines of communication now open, discussions are under way to create a new telecoms giant, Vodafone-Liberty, which would have a combined valuation of around £90 billion.
Buxton, who is also chief executive of Old Mutual Global Investors, said the ‘dream deal’ would be an asset swap rather than an acquisition. Vodafone represents the ninth largest position in the £2.3 billion Old Mutual UK Alpha fund, representing 3.6% of the portfolio.
The swap would involve Vodafone’s UK business moving to Liberty Global, while Vodafone would take on some of Liberty’s European assets.
‘The dream deal is an asset swap that would mean an exchange of Vodafone’s UK assets to Liberty in exchange for its German and other European assets,’ Buxton said.
Although Vodafone can afford to buy some of Liberty’s European assets, Buxton said a reasonable amount of synergies would need to happen for the deal to be worthwhile. Ultimately, he is concerned that Vodafone could end up financing a substantial deal and still be left with a sub-scale business in the UK.
‘The dream deal is so obvious,’ he said. ‘Utterly compelling logical deals do happen but it’s just a case of when. I would like to think [Vodafone and Liberty] will end up moving in that direction because just acquiring [part of Liberty’s business] is not a neat solution,’ he explained.
Shell's bright future
Elsewhere in the portfolio, the fund manager (pictured) has upped exposure to miners and oil majors over the past month. He is positive about the growing use of digital technology by oil majors to improve oil finds from mature fields and drive down the costs of production. In his opinion, this means companies should be able to cope with the prospect of oil trading at ‘$50 a barrel forever’.
Buxton suspects that Royal Dutch Shell (RDSA) - the fund’s largest holding at 5% - could start to buy back shares over the next month. This follows the scrapping of its scrip dividend policy last year, which saw the business issue almost $1 billion of new shares to shareholders in lieu of a cash dividend.
‘It is our largest holding and we are constructive about oil and mining,’ said Buxton.
‘The free cashflow in both cases is supportive of maintaining dividend payments or substantially increasing them.’
Following a volatile month for stock markets, Buxton said he would use any future market weakness to add to consumer-facing stocks, such as retailer Next (NXT) and Premier Inn and Costa Coffee owner Whitbread (WTB). In his opinion, a lot of bad news is already priced into UK domestic cyclicals.
‘Can I see a catalyst for a significant re-rating anytime soon? No, it will be a two or three-year story,’ he said.
The fund manager suspects these shares will start to recover after the UK leaves the European Union next year. He is also monitoring the potential impact of higher interest rates later down the line.
‘Inflation will gradually fall away which is good, and will give the consumer a bit of a shot in the arm, but at the same time we are still facing Brexit uncertainties,’ he said.
Looking ahead, Buxton expects further interest rate rises - potentially two to three – could take place if economic data continues to improve. However, if bond yields spike he said the Bank of England will sit on its hands.
Over the past five years to the end of January, the Old Mutual UK Alpha fund has returned 55.6%. This compares to 55.1% by the average fund in the UK All Companies sector.