The telecom group’s remaining markets are not problem-free.
Staring reality in the face is the healthy thing to do. But there is no guarantee one will like what one sees.
That is the predicament telco giant Vodafone finds itself in. In choosing to sell its €8bn Italian unit to Swisscom outright, it has made the rational decision to exit a hyper-competitive market and to do so cleanly. But the unexciting price it is getting for this once-core asset underscores its weakened position. It remains hard to generate much enthusiasm, as the beleaguered group’s share price shows.
The decision to cut Italy loose after almost a quarter of a century is surprising, not least because it is Vodafone boss Margherita Della Valle’s home turf. But selling to Swisscom is cleaner than the alternative, a potentially messy merger with Iliad, which would have incurred lengthy antitrust approval.
Coming hot on the heels of Vodafone’s exit from Spain, where it sold its unit for €5bn to telecom fund Zegona, this is Vodafone finally making good on pledges to streamline its business. Not perhaps the break-up some investors wanted for the chronically underperforming group but a useful approximation nonetheless.
It is not helping. Vodafone’s shares have continued to slide this year, reaching multi-decade lows. The group is not managing to get full valuations for its assets. Spain was distinctly underwhelming. Swisscom is paying 5.5 times last year’s Italian ebitda adjusted for lease payments. European telecoms incumbents trade at 7.2 times on the same basis, according to Karen Egan at Enders.
True, Vodafone’s Italian business is rapidly shrinking. It also uses intercompany corporate services for €176mn. Adjusting for these plus an unspecified non-cash charge yields a more reasonable 7.6 times for the year to March 2024. On the same basis, Iliad valued Vodafone’s business at almost 10 times, although part of the value would have been equity in the merged entity.
Despite that, this is progress — of sorts. Upon the completion of the Italian and Spanish sales, Vodafone will have reduced leverage, from about 2.5 times 2024 ebitda to about 1.8 times the ebitda of its remaining units. It will also have solved two problems and simplified its structure. Ongoing merger talks with Three in the UK could provide the next step.
Decades of mismanagement are not undone with a single deal. Vodafone’s remaining markets are not problem-free. Germany, for instance, faces a turbulent period of customer churn. And a shrinking business is hard to manage: it needs to shed overheads alongside local units. Vodafone remains closer to the start of its reckoning with reality than the end.
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