Stock Spotlight: Weak signals for Vodafone despite M&A drive

In February, chief executive Nick Read, who took the helm in 2018, confirmed that the group was in talks with rivals in the UK, Germany, Italy and Spain. Last November, he told investors that the company was on the lookout for deals, including a possible merger with rival Three UK. 

Today (3 October), the takeover discussions were confirmed, which Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, noted received a “lukewarm” reception.

“This may be due to the significant regulatory hurdles ahead for the deal, as the authorities weigh up the potential ceding ownership of more core UK infrastructure to an overseas owner,  but also perhaps the terms, with some analysis suggesting that Vodafone’s market share is almost double that of Three’s,” she said.

Streeter noted that the aim of this merger would be to create a company with bigger scale to fully capitalise on the opportunities provided by the 5G roll out, given that setting up and maintaining networks is a hugely expensive business.

The share price of the telecoms giant has more than halved since the start of 2018 but Vodafone’s publicly stated intention to pursue consolidation attracted French billionaire Xavier Niel, who last month bought a 2.5% stake in the company through its investment fund, Atlas Investissements.

In a statement, Atlas said it saw opportunities to “accelerate the streamlining of Vodafone’s footprint and the separation of its infrastructure assets, further reduce costs, improve profitability, accelerate broadband development in Germany and other geographies, and enhance focus on innovation”.

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Cevian Capital, Europe’s largest activist fund, also bought a stake in the company in January. The investor has been pushing Vodafone to restructure its portfolio, improve its strategy in key regions and reshuffle its board to put an end to years of poor share price performance.

Russ Mould, investment director at AJ Bell, said there is a possibility that the presence of these two investors could goad the Vodafone board into more dramatic action on the group’s structure, which he said “looks like an investment trust of telecoms assets with plenty of debt attached”.

£12bn Vantage Towers deal

Last week, a This Is Money report revealed that Vodafone was looking to sell its stake in Vantage Towers, the phone masts giant which floated in Frankfurt last year, for £12bn, which could help clear the company’s £36bn debt pile.

According to analysts at Bernstein, the sale of the mast business would allow Vodafone to remove £2.2bn of debt from the balance sheet and provide more than £6bn in cash. 

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The most likely option would be a no-control deal, This Is Money reported, where the group would sell half of its holding to a private equity firm, with KKR, Global Infrastructure Partners and EQT all marked as bidders. 

Neil Campling, head of TMT research at Mirabaud Equity Research, said that any deal with private equity would help Vodafone to remove some of Vantage’s debt from its balance sheet. 

“You can see why private equity would be interested because of the stable cash-flows and long-duration assets,” he said. 

‘Little growth narrative’

Despite the reported deal, AJ Bell’s Mould maintains that Vodafone seems to have “little growth narrative” to attract investors, either in terms of earnings or the dividend, even with its efforts to create one through asset purchases and acquisitions.

“Investors have been concerned by the company’s debt pile ever since it bought the bulk of Liberty Global’s European broadband activities,” he said.  

According to Mould, other worries for markets include competition in the core mobile telecoms markets of the UK, Germany, Italy and Spain.

He also noted that the capital expenditure requirements to stay competitive in so many geographies and in so many arenas, such as 5G and broadband, could restrain dividend growth, “even if Vodafone is trying to allay such fear with asset sales and network sharing plans”.

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Javier Correonero, equity analyst for European telecommunications at Morningstar, said that like most telecom firms in Europe, Vodafone operates in a challenging environment, with no indications this is going to change. 

“Markets with price wars, regulators forcing the entrance of new mobile players and blocking market consolidation, already penetrated markets and capital-intensive investments… Vodafone’s aim should be to maintain its market share in as many countries as it can,” he said.

Correonero also pointed out that divesting from some of its non-core businesses in Africa and Eastern Europe, like they did in Hungary one month ago for €1.8bn, would make Vodafone’s equity story ‘cleaner’ and give better visibility on fundamentals.

7% dividend yield

Mirabaud’s Campling said that although Vodafone is “undeniably cheap”, the group needs to execute on a path to higher returns, revenue growth, debt reduction, and shareholder friendly actions.

“The dividend yield of 7.3% looks attractive but the dividend has not actually grown for five years. For income growth investors, that needs to be addressed to attract investors, starved of yield in recent years, back to the table. It is time for Vodafone to deliver,” he said. 

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Mould said that “contrarians could be forgiven for thinking there may be some value to be had” in Vodafone, given that shares trade no higher now than they did in 1998, especially for overseas investors who could get the benefit of a weaker pound. 

“Investors may also warm to the €0.09 dividend, which equates to a dividend yield of more than 7%. This is paid in euros, so UK-based investors will also get a bit of a currency benefit if the pound stays weak.”

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