After a tumultuous few weeks, Vodafone and its chief executive have been granted some relief.
On Saturday, Emirates Telecommunications Group announced that it had acquired a 9.8 per cent stake in the European telecoms company for about $4.4bn, one of the largest investments it had made in over a decade.
The state-controlled investment group, whose chief executive spent 17 years in senior positions at Vodafone, voiced unreserved support for the company’s management and strategy.
The surprise arrival of the UAE group, formerly known as Etisalat and now rebranded e&, to pole position on Vodafone’s shareholder list, “gives management a bit of breathing space”, said a top-20 investor in the London-headquartered company.
Vodafone’s chief executive Nick Read “will probably be given at least this year” to show he can turn round the business, he added.
The company painted an uninspiring picture of its growth prospects in 2023 at its annual results this week. A rising chorus of investors, analysts and industry insiders believe Vodafone now urgently needs to make good on its promise of dealmaking in some of its poorer performing markets.
The telecoms group has been under mounting pressure since it emerged earlier this year that Europe’s largest activist investor, Cevian Capital, had taken an undisclosed position in the company and was angling for significant structural change, including giving regional executives more power, and the pursuit of mergers, acquisitions and sales for weaker parts of its business.
One of Vodafone’s most glaring challenges has been its sliding valuation, having underperformed peers in the sector for years, although it has recovered marginally this year.
This week, it added salt to the wound by revealing that it had delivered weak growth and shed subscribers in Germany — its most profitable market — which accounts for about 40 per cent of group profits.
Although e& has expressed its support for the time being, like all long-term investors it will expect value creation.
“Anyone who invests $4.4bn expects a decent return,” said a second top-20 investor, adding that the investment company was “clearly ambitious and demanding”.
“Etisalat’s dawn raid adds significantly to the performance pressure on the company,” they added.
The question now is whether Read can use the coming months to pursue a strategy that almost all stakeholders agree with: improvements in Germany, a significant cash-making deal for Vodafone’s spun-out phone masts business Vantage Towers, and the pursuit of mergers, acquisitions or sales in countries like the UK, Italy and Spain.
“Vodafone’s potential is obvious to all. The problem is management’s longstanding inability to realise it,” said the second investor. “They need to execute on a number of significant and good disposals and mergers — which they have repeatedly failed to do. Meanwhile, they need to get more juice out of their good businesses, like Germany.”
But there are potential partnerships on the horizon. Last week, the Financial Times reported that Vodafone had initiated talks with CK Hutchison to combine its UK operations with Three UK.
Read told the FT that he was pleased that all investors appeared to agree on his stated strategy for the years ahead. “Some people would like us to go faster,” he added. “We’d all like it faster.”
Vodafone’s full-year earnings targets for 2023 were lower than anticipated, which management attributed principally to the impact of inflation, but was as much a product of a poor performance in Germany, where the company lost 240,000 broadband and mobile customers in the latest quarter.
“I am not satisfied with our commercial performance in Germany,” Read said, attributing many of the defections to cheaper rivals to an IT problem related to the implementation of a new telecoms law.
The company reported revenues up 4 per cent to €45.6bn and a 5 per cent increase in core earnings to €15.2bn in the year to March, broadly in line with analyst expectations.
But Karen Egan, an analyst at Enders Analysis, noted that Vodafone’s earnings growth last year was boosted by unusually favourable currency movements and a one-off gain. She added that the company would struggle to obtain its 1-4 per cent growth target next year “with their cash cow, Germany, struggling as it is”.
Deals, deals, deals
Pursuing deals in strategic parts of its portfolio is now widely seen as Vodafone’s main avenue for growth. These could come in many forms, but investors are most eager to see a much-touted merger materialise for the Vantage towers business, and consolidation with mobile and fixed operators in the UK, Italy and Spain.
On Vantage, Read has been clear that he is looking to pursue a model of joint control with another industrial telecoms group, namely Deutsche Telekom or France’s Orange. Given that this prospect was first raised six months ago, investors are beginning to grow impatient.
A merger with a company like Totem, Orange’s towers subsidiary, would free up large amounts of cash and allow Vodafone to reduce its debt, with some analysts forecasting that it could get as low as 2.2 times earnings before interest, tax, depreciation and amortisation. Vodafone has already brought its leverage down to 2.7 times ebitda, at the low end of its 2.5 to 3 times target.
“The market thinks Vodafone has probably got a bit too much debt and [a Vantage deal] would open up the opportunity of increasing shareholder returns through share buybacks, which would be taken well,” said the first top-20 investor.
There is another potential advantage: freeing up capital for further mergers and acquisitions in poorer performing markets such as the UK, Italy and Spain.
The investor added that he was confident that value-creating deals would begin to materialise this year.
“The biggest change which the market is underestimating is that Vodafone’s relationship with the government and regulators has never been better,” he said. “Read has laid a lot of the groundwork for consolidation that doesn’t catch the headlines in the way that an announced transaction does.”
Read himself echoed these sentiments this week, telling the FT that “the regulatory landscape had moved more favourably”.
But not everyone is convinced that dealmaking will be the salvo to all of Vodafone’s problems, many of which are structural and entrenched. Some investors and analysts point to the fact that the company’s labyrinthine organisation makes it difficult to understand, and the business is currently valued at significantly below the sum of its parts.
“I don’t know if M&A is enough to fundamentally change the growth profile of this business,” said one investment manager who has advised his clients to hold rather than buy. “Vodafone could blow a lot of money on headline deals that fundamentally don’t change anything.”