Two decades ago Vodafone was riding high, pulling off a blockbuster takeover with its 2000 acquisition of German rival Mannesmann in a deal worth £113 billion (€130 billion).
Now the telecoms group – still the second biggest network provider in Ireland – is making headlines for its retreat, after announcing this week it will exit Spain, one of its main European markets, selling its business there for up to €5 billion to a fund founded by two former Virgin Media executives.
The retrenchment represents both a humbling for the telecoms group and what investors hope signals a fresh start following years of a languishing share price. Any shareholder who had stuck with them since the time of the Mannesmann deal would have experienced a fall of around 85 per cent in the value of their holding.
Vodafone’s previous strategy “was all around building the empire”, said Kester Mann, director of consumer and connectivity at CCS Insight. “It has come ... full cycle now.”
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For years Vodafone has grappled with a sprawling array of businesses leading to shareholder pressure to ditch underperforming units. However, the group has previously struggled to complete deals in its most challenging markets, including Italy and the UK as well as Spain.
The deal with telecoms fund Zegona was welcomed by some investors and analysts who believe it shows that new chief executive Margherita Della Valle – who vowed to turn things around after she took over on a permanent basis in April – can deliver when it comes to M&A.
One top 10 shareholder said it was “encouraging” to see the new chief executive “proactively addressing the European markets where Vodafone makes sub-par returns”.
Spain is the second major deal secured by Della Valle since she took the top job at the start of this year. A company veteran, she has been at the group for almost three decades and was formerly its chief financial officer until former boss Nick Read stepped down.
In June, Vodafone announced a plan to merge its UK operations with Three-owner CK Hutchison to create the UK’s largest operator after talks had been ongoing for more than a year.
Karen Egan, a senior telecoms analyst at Enders Analysis, said the Spain deal will be taken as a positive sign that Della Valle is “delivering on her promises” and that it “helps to demonstrate that she is delivering deals in a way [her predecessor] did not manage to”. Read stepped down at the end of a turbulent period in which Vodafone missed out on a chance to tie up with Spain’s MasMovil, paving the way for France’s Orange to do a deal.
An executive at another European telecoms group said it was a “good deal in a very, very difficult market and with an asset which is underperforming”.
Della Valle said in May that the group “must change” as investors and analysts scrutinise its presence in other European markets, particularly Germany.
“In Vodafone you go from one big challenge to the next [and] the big challenge is Germany,” the European executive said.
Vodafone significantly beefed up its presence in Germany after it acquired Liberty Global’s cable networks in the country as part of a blockbuster €18.4 billion takeover in 2018 which also included assets in eastern Europe.
The country is now its largest market and accounts for about 30 per cent of its most recent annual €38 billion in group service revenue, a key measure which includes sales from contracts, network use and roaming.
Vodafone has said it is “well-placed” in the German market but has been losing customers, due to challenges including the quality of the cable network and customer service, according to James Ratzer, a partner at New Street Research.
“Maybe there are some early signs that they are getting around the problems that they had in the past,” he said. “However ... they have to go out and prove to people that they can actually do that.”
Service revenue in Germany declined for a fifth consecutive quarter in the three months to the end of June.
Egan said Germany was “obviously a very problematic market. That’s going to be quite a challenge to turn around quickly.”
The group’s Italian operation could also be ripe for a shake-up, Della Valle has signalled, saying in July that along with Spain the market there would also “benefit from consolidation”. Last year the group rejected an offer of more than €11 billion for its Italian business from French billionaire Xavier Niel’s Iliad and private equity fund Apax.
Investors will be looking for more information on that, as well as signs of improving performance, when Vodafone reports interim results later this month.
However, the top 10 shareholder fears that a dividend cut is becoming more likely due to “operational and cash flow headwinds ahead” and that Della Valle may use Vodafone’s shrinking size as rationale for a cut.
Vodafone said a capital allocation review, including the optimal use of the proceeds from the Spain transaction, will follow completion of the deal.
Meanwhile the proposed merger with Three UK, which is being investigated by the Competition and Markets Authority, is being challenged by the Unite union. It argues that a further 1,600 jobs would be at risk from the merger in addition to the 11,000 across the UK and elsewhere Vodafone announced in May.
Vodafone said it was “too early” to talk about any impact on roles. It also pushed back against the suggestion it had undertaken a strategic walk-back over the past decade and said it was “more of a refocusing on Europe and Africa”, citing the acquisition of Liberty Global’s assets and the proposed Three UK deal, as well as a “simplifying [of its] portfolio through select disposals”.
Ultimately Ratzer said Della Valle will be judged on operational performance: “I think what people would love to see is Vodafone starting to turn the top line service revenue trend around,” he said. – Copyright The Financial Times Limited 2023
