Vodafone has agreed to sell Vodafone Spain to Zegona, for a total consideration of $5.0bn. This values the business at 5.3 times its underlying cash profit, or 12.7 times operating free cash flow. Vodafone expects to receive a minimum of $4.1bn in cash from the deal, plus preference shares in Zegona.
The two parties have entered into an agreement whereby Vodafone will provide certain services to Vodafone Spain for a total annual service charge of around €110m.
Subject to relevant approvals, the deal is expected to be completed in the first half of 2024.
The shares were broadly flat in early trading.
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Our view
The transformation at Vodafone is in its infancy, and there's a long way to go - but tentative signs of green shoots are emerging.
Price hikes are starting to feed through in a few areas of the business, helping service revenue performance. But these are temporary measures, and the wider issues associated with recent lacklustre performance need addressing.
Sales in the telecom sector should be relatively robust, as broadband and mobile services are hardly optional. Yet, over the last ten years, telecom giants have had to pump huge sums of cash into building out fibre networks and snapping up parts of the 5G spectrum. The main challenge has been the low sales growth relative to spending when you look at telecoms compared to other sectors.
Vodafone's not only had the structural headwinds to battle, but it's also been underperforming versus peers on a relative level. Service revenue growth and customer satisfaction in key areas like Germany, Italy and Spain have struggled to keep pace with peers.
In response, Vodafone has an evolved strategy. There's job cuts, the merger of its UK business with Three UK, and the recently agreed sale of the underpforming Spanish division. All in an attempt to streamline the business and allow focus in areas like Vodafone Business that offer the most potential.
We welcome the change, but there's a lot to do.
The key market of Germany is a perfect example of the challenges at hand. After more than €20bn of investment, service revenue and customer numbers are moving in the wrong direction. IT systems have been slow to adapt to new regulation, and network performance continues to lag competitors. A new management team in Germany is in place, which we support, it now needs to deliver more than just price hikes.
Outside Europe, the Vodacom subsidiary has some exciting growth opportunities in Africa and is targeting mid-high single digit cash profit growth over the next few years. Africa could become increasingly important as the region develops, and Vodafone's leading position in several markets means it's well positioned to benefit.
Net debt, which was €33.4bn last we heard, sits in a range the new CEO says she's comfortable with. For us, it's still a little lofty and, while operating cash flow is stable, cash demands are high. Free cash flow for the new year is expected to currently cover the dividend payments. But we advise caution over the medium term and we're expecting a review of the capital allocation policy next year. Remember, no dividends are guaranteed.
All-in-all then, while we think the portfolio changes and new strategy make sense, the fundamental challenges that go with being a telecom remain. And with growth hard to come by, we'll need to see sustained positive progress before getting too excited.
Vodafone key facts
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