* Vodafone buying broadband assets to shore up Europe
* Shareholders unfazed by cable's high valuations
* CEO Colao standing boosted by giant Verizon sale
* AT&T interest in Vodafone could cool if Colao spends
By Kate Holton and Leila Abboud
BARCELONA, Feb 26 Shareholders in Vodafone
say they support Chief Executive Vittorio Colao's plan
to rebuild the company with pricey European broadband assets,
even though it could complicate a lucrative mooted bid from AT&T
Fresh from the sale of the company's U.S. arm for $130
billion, Colao has said he could spend up to $40 billion on
acquisitions to shore up its recession-hit European operations,
with the initial focus falling on superfast cable networks.
Top of the list is Spain's cable operator Ono, which would
help Vodafone keep up with the growing popularity of
all-included bundles of mobile to fixed-line services as well as
help it carry the ever-increasing data traffic on its networks.
Vodafone shareholders have proven surprisingly unfazed by
Ono's eye-popping 7 billion euro-plus price tag, nor do they
think Colao should just sit tight and wait for a possible bid
from AT&T while his European business deteriorates.
"You cannot stop running a business while you negotiate
possible deals," a top 20 shareholder in Vodafone told Reuters,
when asked about the likely impact on an AT&T deal.
"Vodafone is in a weak position in Spain. Regardless of
AT&T, if Vodafone wants to keep Spain it needs to put more money
into capex and fix the business."
One person, however, who does not agree with Colao's
strategy of splashing out on broadband is AT&T boss Randall
Stephenson, who has expressed an interest in expanding in
Europe - with Vodafone tipped as the most likely target - was
reported by the Wall Street Journal this week as having said
that buying cable assets wasn't what he would do, as the
wireless market was a better option.
AT&T, which declined to comment on the WSJ report, said in
January it would not bid for Vodafone in the next six months,
after being forced to make its intentions clear by the British
One of Vodafone's biggest 10 shareholders said AT&T would
prefer not to watch Vodafone spend the proceeds of the Verizon
deal, but it wouldn't change the American company's mind on the
virtues of a takeover.
"I don't think Vodafone's buying would really put them
(AT&T) off," the shareholder said, on condition of anonymity.
Like its rivals, Vodafone has been hammered in its big
European markets in the last five years due to fierce
competition sparked by the recession and price cuts imposed by
In Spain, Vodafone's core earnings fell by nearly a quarter
to 422 million pounds in the first half of its fiscal year. Its
core profit margin fell to 22.9 percent from 27.2 percent.
The situation is not much better in Italy, where core
earnings fell 25 percent to 818 million pounds in the same
period, while margins fell to 36.9 percent from 42.5 percent.
In total the group has written down the value of its
European businesses by around 20 billon pounds.
Newly flush with cash from the U.S. deal, Vodafone has said
it will invest $30 billion to improve its infrastructure in
Europe, Africa and India and either build superfast broadband
networks, or buy them.
The addition of fixed-line assets in Spain would enable
Vodafone to provide a stronger challenger to market-leader
Telefonica by offering pay-TV, mobile, fixed-line and
broadband in one bundle. It could also move its data traffic
onto the high-capacity network.
Under Colao, Vodafone has largely shed its old reputation of
an expansionist group that overpaid for assets, earning back
investor trust with a series of minority disposals in France,
Poland and China.
Colao's one mis-step on M&A was passing up on buying Kabel
Deutschland, Germany's largest cable operator, ahead of its
initial public offering in 2010, only to pay nearly four times
the IPO price when he bid for it three years later. His move for
Britain's Cable and Wireless Worldwide for 1.3 billion pounds in
2012 was seen as a cannier buy.
Colao's standing among investors rose even further when he
pulled off the deal that had eluded his predecessors, the sale
of the 45 percent stake in Verizon Wireless, funnelling $84
billion in cash and shares from the deal back to shareholders.
"He has already delivered on selling the Verizon stake for a
whopping $130 billion," Bruno Grandsard, the senior portfolio
manager at Global Equities, AXA IM, told Reuters. "So if he
spends 15 billion euros or so on pricey cable assets in Europe,
I think most shareholders will forgive him that."
Acquiring Ono would give Vodafone a fibre network covering
7.2 million of Spain's 16 million households, in largely rural
areas that would complement Vodafone's own fibre network, which
it is building with Orange in the biggest cities.
It has approached the private equity owners of Ono about a
deal, but publicly the cable operator has said it will continue
with its plans to float the business, putting pressure on
Vodafone to offer more.
"The asset makes a lot of sense from a strategic point of
view," the top 20 Vodafone shareholder told Reuters on condition
of anonymity. "It doesn't mean they should spend crazy money on
it, or outbid the IPO, though."
In Italy, Colao's most logical target would be Fastweb, a
unit of Swisscom, which has built a national fibre
broadband network. Vodafone has approached Swisscom in the past
about the company, but bankers told Reuters in January that the
group was not eager to sell at the moment.
In recognition of the superior speeds a cable network can
achieve, cable operators enjoy heady valuations. They trade on
an enterprise value to 2013 core profit multiple of 9.4,
according to Reuters data, while the telecoms sector trades on a
multiple of 7.5.
"I've just completed a mini-roadshow and I would say
shareholders are on board with the new strategy," Colao told
reporters in Barcelona at the Mobile World Congress trade fair.
"My real challenge is to keep the discipline but push ahead
at the same time."