There’s hidden value in Vodafone Group, the sprawling telecommunications company (and parent of South Africa’s Vodacom Group) whose market capitalisation has shed more than US$50-billion in nearly five years. It offers business students a lesson in the good, the bad and ugly of mergers and acquisitions. The only thing missing is the ultimate deal: a break-up bid.
Things aren’t going well. The shares recently slid beneath the psychological 100p level. The competition has been whipping Vodafone in Germany, its main market. Management is struggling to convince investors that high debt from dealmaking will come under control. Activist Cevian Capital gave up on the stock earlier this year, but telecoms billionaire Xavier Niel has taken its place as a potential agitator.
Rewind to 2013 and it’s hard to believe Vodafone could have got into such a pickle. Then-CEO Vittorio Colao agreed to an exit from its joint venture with Verizon Communications for $130-billion. Most of the payment received — mainly a mix of cash and Verizon shares — was funnelled to shareholders. That was a great deal making a hiatus in years of empire building. Sadly, the sequels in this M&A saga have been a letdown.
Vodafone added cable infrastructure to its portfolio pursuing a so-called convergence strategy to sell phone, Internet and pay-television services. Having offered $11-billion to take control of Kabel Deutschland in Germany, it then gobbled up Spain’s Grupo Corporativo ONO for $10-billion. The Spanish market later became viciously competitive.
In 2018 came the $22-billion acquisition of assets from rival Liberty Global. This filled gaps in Vodafone’s German coverage. Less than a week after the announcement, Nick Read, then chief financial officer, was announced as Colao’s successor and given the mammoth integration job. True, Colao had been boss nearly 10 years, but the succession was hardly ideal. Vodafone shares have badly trailed European peers ever since.
To be fair, the idea of becoming a bundled telecoms provider made sense, and it would have taken years to build this from scratch instead of doing acquisitions. The snag is that Vodafone has not run the assets well. Having initially reaped synergies, poor customer service has seen it lose German market share. If you do expensive M&A, you have to be a flawless manager of what you buy.
Headroom
Vodafone also took on a lot of debt. It’s a fine judgment, but it would have been wiser to retain more of the roughly $80-billion returned to shareholders after the Verizon deal and keep more headroom.
Then there are the deals Vodafone didn’t do, or took its time over. Its assets span Europe and emerging markets. Yet what matters most in telecoms is scale within not across borders, while a multinational footprint adds complexity for investors. Vodafone could have done more to focus on select markets in Europe while finding better owners for everything else. That would have accelerated debt reduction and made the company a more manageable beast.
Earlier this year Vodafone passed on a deal with Masmovil Ibercom, letting Orange steal a march on Spanish consolidation. And while this month’s agreement on a partial sale of its mobile towers will cut leverage, it’s a governance fudge with a consortium of private equity and Saudi Arabian money. It would have been better to do a straight disposal years ago.
There is no rabbit that CEO Read can now pull from the hat. Regulators are likely to be more wary of permitting consolidation within Vodafone’s markets when consumers are stretched. A mooted combination with Three UK, owned by CK Hutchison Holdings, has yet to materialise.
Read’s best bet is to run the operations better, cut costs and grasp any M&A opportunities that fortune presents hereon. He could also be clearer that shareholders will benefit as debt comes down. Analysts at New Street Research see potential for a €4.9-billion cash return if things go well.
A smaller company with this record would be a takeover target itself. Vodafone’s enterprise value, exceeding $90-billion, offers protection from that threat. The fantasy deal would be a well organised consortium of buyers looking to carve up the firm between them. If that loomed, defending the status quo would be a huge challenge.
It’s up to chairman Jean-François van Boxmeer to decide whether Read is successfully leading Vodafone out of the mire. But any CEO here would have the same limited options for turning this monster around. — (c) 2022 Bloomberg LP
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