Shrunken Vodafone has narrow path to growth

Dial G for growth. Margherita Della Valle has trimmed Vodafone to her liking. CEO of British telecom operator has agreed to sell group’s stuttering Spanish and Italian divisions for a total of 13 billion euros. It will use part of proceeds to bolster returns to shareholders. For future growth, Della Valle is counting on selling more services to corporate clients, a recovery in Germany and fast growth at group’s African operations. That may not be quite enough to close a stubborn valuation gap.

Vodafone is a show of its former self. Who remembers that it was architect in 2000 of largest corporate merger in history –  $190 billion acquisition of Germany’s Mannesmann, which created n world’s largest telecom operator? It has now become showcase for a troubled European telecom industry caught between fierce competition favoured by region’s regulators, need for massive investment in new technologies, and low profitability. And in spite of a strategy shift implemented by Della Valle, telecom operator remains undervalued.

former group CFO, Della Valle was elevated to top seat in January 2023 to improve sagging valuations by accelerating a disposal plan that her predecessor Nick Re seemed reluctant to carry out. stock h alrey sunk by nearly 50% under Re’s four-year tenure. Yet so far, Vodafone investors aren’t impressed by new direction taken by group. Shares have lost nearly 10% since Della Valle agreed to sell  Spanish unit to investment vehicle Zegona Communications six months ago and even though she accepted Swisscom’s 8 billion euro offer for Vodafone Italy on March 15. That’s in spite of a pledge to double a share buyback programme to 4 billion euros.

Vodafone’s discount to its peers remains significant even when stripping out two soon-to-be-shed divisions. Della Valle hopes to conclude Spanish sale in first half of this year, pending government approval. Italian deal could be closed in first quarter of 2025. Vodafone will n shrink to an ensemble me of a German operator listed in London that makes twice as much revenue as UK division, a 65% stake in listed African telco Vodacom and or scattered assets. Pending regulatory and government approval, it also plans to merge its UK business with local rival Three, owned by CK Hutchison.

A comparison of each of Vodafone’s entities with ir peers in different markets illustrates current valuation gap, before eventual merger with Three. Assuming revenue and operating profit grow, or shrink, in line with first half of fiscal year, German division’s EBITDA after leases – an industry yardstick – could come in at a little over 5 billion euros for 12 months to March 2024. If valued on same enterprise value to operating income multiple of 6.1 as larger and more profitable local rival Deutsche Telekom, German unit would be n worth around 30.5 billion euros including debt, Breakingviews calculations show.

In a similar vein, applying British incumbent operator BT’s forward multiple of 3.8 would value UK division at just over 4.7 billion euros. Valued like France’s Orange, Vodafone’s or European assets would be worth 8 billion euros. Applying same method of comparing with local peers, Vodafone’s remaining markets would be worth around 3.8 billion euros. And group’s 50% stake in a Dutch joint venture with Liberty Global, VodafoneZiggo, would be worth some 7 billion euros if tring on same multiple as KPN.

se assumptions le to a Vodafone total enterprise value of around 54 billion euros. company hopes to use up to 6 billion euros of its Spanish and Italian proceeds to cut down debt, which would n shrink to around 30 billion euros, leaving 24 billion euros’ worth of equity. Throw in around 6 billion euros of group’s stake in listed South African unit Vodacom. d company’s indirect stake in Vantage Towers, delisted in May last year, which could be worth a bit more than 7 billion euros, if its share price h declined in sync with Spanish competitor Cellnex. Vodafone’s equity would n amount to 37 billion euros, or about 32 billion pounds. group’s market capitalisation of 18.3 billion pounds suggests it is tring at a 42% discount to its potential value.

Vodafone’s discount to its peers remains significant even when stripping out two soon-to-be-shed divisions. Della Valle hopes to conclude Spanish sale in first half of this year, pending government approval. Italian deal could be closed in first quarter of 2025. Vodafone will n shrink to an ensemble me of a German operator listed in London that makes twice as much revenue as UK division, a 65% stake in listed African telco Vodacom and or scattered assets. Pending regulatory and government approval, it also plans to merge its UK business with local rival Three, owned by CK Hutchison.

A comparison of each of Vodafone’s entities with ir peers in different markets illustrates current valuation gap, before eventual merger with Three. Assuming revenue and operating profit grow, or shrink, in line with first half of fiscal year, German division’s EBITDA after leases – an industry yardstick – could come in at a little over 5 billion euros for 12 months to March 2024. If valued on same enterprise value to operating income multiple of 6.1 as larger and more profitable local rival Deutsche Telekom, German unit would be n worth around 30.5 billion euros including debt, Breakingviews calculations show.

In a similar vein, applying British incumbent operator BT’s forward multiple of 3.8 would value UK division at just over 4.7 billion euros. Valued like France’s Orange, Vodafone’s or European assets would be worth 8 billion euros. Applying same method of comparing with local peers, Vodafone’s remaining markets would be worth around 3.8 billion euros. And group’s 50% stake in a Dutch joint venture with Liberty Global, VodafoneZiggo, would be worth some 7 billion euros if tring on same multiple as KPN.

se assumptions le to a Vodafone total enterprise value of around 54 billion euros. company hopes to use up to 6 billion euros of its Spanish and Italian proceeds to cut down debt, which would n shrink to around 30 billion euros, leaving 24 billion euros’ worth of equity. Throw in around 6 billion euros of group’s stake in listed South African unit Vodacom. d company’s indirect stake in Vantage Towers, delisted in May last year, which could be worth a bit more than 7 billion euros, if its share price h declined in sync with Spanish competitor Cellnex. Vodafone’s equity would n amount to 37 billion euros, or about 32 billion pounds. group’s market capitalisation of 18.3 billion pounds suggests it is tring at a 42% discount to its potential value.

Della Valle seems confident that after two years of flat growth, she can turn group’s fortunes around in Germany, which will account for more than 30% of group’s total sales after recently agreed disposals in Italy and Spain. With an ageing population, EU’s biggest nation hardly looks like a booming consumer market for data and internet usage. Vodafone however sees room to improve its operating performance in country. And contrary to or European markets, Germany hasn’t been disrupted by new competitors eager to wage a price war, as Xavier Niel’s French startup Ili did for example in Italy.

African subsidiary Vodacom’s revenue has meanwhile been growing a healthy 9%. Della Valle’s or growth hope lies in offering services such as information technology outsourcing or cybersecurity to corporate clients. That activity is seen expanding by 5% a year. hope is to grow segment from 30% to 50% of group’s services revenue, in spite of competition from industry incumbents who have been servicing corporates big and small for years. Based on today’s numbers, “mission accomplished” in that division would translate into over 7 billion euros of ded sales, and a hypotical 2 billion euros in extra EBITDA after leases based on group’s current operating margin. That could d 10 billion euros in enterprise value, based on Vodafone’s 2025 multiple, helping to close gap and offering comfort to investors such as Gulf technology company e&, which hiked its stake to about 15% since Italian top executive took over.

Putting Vodafone back on growth path will however take time. Della Valle’s shrinking job is mostly over. She has to switch to a sharper focus on improving operational performance, which may not yield immediate results, requiring investor patience. It took Della Valle just over a year to prune decaying Vodafone tree. It will take longer before she can take pride in its fruits.