Things are not going well. Shares recently fell below the psychological 100p level. Competition was hitting Vodafone in Germany, its main market. Management is struggling to convince investors that the high debt generated by the deals will be brought under control. Activist Cevian Capital AB dumped the stock earlier this year, but billionaire Xavier Niel has taken his place as a potential instigator.
Go back to 2013 and it’s hard to believe that Vodafone got into such a pickle. Then-CEO Vittorio Colao agreed to exit his joint venture with Verizon Communications for $130 billion. Most of the payments received—primarily a mix of cash and Verizon stock—were transferred to shareholders. It was a huge hole in the empire-building years. Sadly, the sequels in this M&A saga have been a disappointment.
Vodafone has added cable infrastructure to its portfolio, pursuing a so-called convergence strategy to sell telephone, internet and pay-TV services. After offering $11 billion to take control of Germany’s Kabel Deutschland Holding AG, it then acquired Spain’s Grupo Corporativo ONO SA for $10 billion. The Spanish market later became fiercely competitive.
In 2018, the $22 billion acquisition of assets came from rival Liberty Global Plc. This filled the gaps in Vodafone’s German coverage. Less than a week after the announcement, Nick Reed, then CFO, was announced as Colao’s successor and given the mega merger job. It is true that Colau was chief for nearly 10 years, but the succession was not perfect. Since then, Vodafone shares have fallen sharply behind their European peers.
To be fair, the idea of becoming an aggregator communications provider made sense, and it would have taken years to build this from scratch rather than making acquisitions. The snag is that Vodafone has not managed the assets well. Having initially reaped synergies, poor customer service led to a loss of German market share. If you’re into expensive M&A, you have to be an impeccable manager of what you’re buying.
Vodafone also took on a lot of debt. It’s a good judgment, but it would have been wiser to keep more of the about $80 billion that was returned to shareholders after the Verizon deal and to keep more space.
Then there are the deals that Vodafone didn’t execute, or that took its time. Its assets extend to Europe and emerging markets. However, what matters most in telecom is scale within rather than 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 the deleveraging process and made the company a more manageable beast.
Earlier this year, Vodafone passed a deal with Masmovil Ibercom SA, allowing Orange to steal a march towards the Spanish merger. And although this month’s agreement on the partial sale of its mobile towers will lower leverage, it is a governance stunt with a consortium of private equity and Saudi funds. It would have been better to dump directly years ago.
There is no rabbit that CEO Reid can pull out of the hat. Regulators are likely to be more wary of allowing consolidation within Vodafone’s markets when consumers are under pressure. A combination float with Three UK, owned by CK Hutchison Holdings Ltd, has yet to materialize.
Read’s best bet is to better manage operations, cut costs, and seize any M&A opportunities that fortune presents here. It can also be clearer that shareholders will benefit with lower debt. Analysts at New Street Research see the potential for a cash return of €4.9 billion ($5.1 billion) if all goes well.
A smaller company with that record would be an acquisition target in itself. Vodafone’s enterprise value, which exceeds $90 billion, provides protection from this threat. The fictional deal would be a well-organized consortium of buyers looking to split the company between them. If that is on the horizon, defending the status quo will be quite a challenge.
It is up to chairman Jean-François van Boxmeer to decide whether Reid can successfully lead Vodafone out of the mud. But any CEO here would have the same limited options to turn this beast around.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters, Breaking Views, the Financial Times and The Independent.
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