Vodafone intruder adds hope to activist toolbox
[1/2] The Vodafone logo is seen at the Mobile World Congress in Barcelona, Spain, March 1, 2017. REUTERS/Paul Hanna
LONDON, Jan 31 (Reuters Breakingviews) - Vodafone’s (VOD.L) activist investor is relying on an unconventional ‘fingers-crossed’ approach to boosting the UK telecoms operator’s value. Cevian Capital, which has acquired an undisclosed stake in the 36-billion-pound company, wants Chief Executive Nick Read to push harder for consolidation in crowded markets. The strategy is worryingly reliant on the acquiescence of competition watchdogs.
It’s no surprise Vodafone has ended up on activists’ radars. Over the last five years, the company has delivered a total return including dividends of minus-4.7%, against a 28% for the benchmark FTSE 100 Index. Over the same period, Vodafone’s Johannesburg-listed African subsidiary, Vodacom (VODJ.J), has managed 7.2% in hard-currency terms.
Yet activists appear short of clear quick fixes. Fully spinning off Vodafone’s African and newly listed mobile towers unit would not obviously unlock much value. The company is too big to be a takeover target for all but the very largest predators. And installing a new CEO would not address its structural challenges.
Like its rivals, Vodafone is grappling with the massive investment required in new technology – most recently 5G mobile networks and fibre-optic broadband – combined with highly competitive end-markets. Fixing the former is tough, especially since Western governments red-carded China’s Huawei Technologies, the cheapest major provider of 5G telecoms kit.
The focus is therefore on consolidation in Vodafone’s main European markets. Hooking up with another operator in Italy, Spain or the United Kingdom would reduce the number of competitors in those countries from four to three, cutting costs and improving pricing power. The United States has just three competing operators while Vodacom earns a 40% EBITDA margin from its less-crowded African patches, against 34% for Vodafone as a whole. Reports of a tie-up between Vodafone Italy and the local unit of Xavier Niel’s Iliad suggest Read has already got the message read more . A deal with KKR-owned (KKR.N) MasMovil in Spain or CK Hutchison’s (0001.HK) Three in the United Kingdom also makes sense.
This assumes competition authorities in London and Brussels agree. Chief European Union regulator Margrethe Vestager, who nixed a “four-to-three” UK deal in 2016, has recently made promising noises. The pandemic has also reinforced the wider importance of profitable and well-capitalised telecoms operators. Cevian is right to prod Read to push harder, but the decision is ultimately out of his hands.
Follow @edwardcropley on Twitter
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
- Cevian Capital has taken an undisclosed stake in Britain’s Vodafone to push for a sweeping overhaul of the telecoms group, the Financial Times reported on Jan. 30, citing people with direct knowledge of the matter.
- The activist investor is pushing for a shakeup of Vodafone’s board, and wants it to be more aggressive in driving consolidation between mobile operators in markets like Spain, Italy and the UK, the paper said.
- Vodafone declined to comment. Its shares gained 4% to 132 pence by 0815 GMT on Jan. 31.
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