Vodafone has agreed in principle to sell its Italian business for €8bn to Swisscom. The price represents a valuation of 7.6 times forecast underlying cash profit.
A further announcement will be made if and when the transaction is confirmed.
The shares rose 3.6 % in early trading.
Third-quarter results (5 February 2024)
Vodafone reported third-quarter total revenue of €11.4bn. Within that, service revenue saw organic growth of 4.7% to €9.4bn. The key German market posted growth of 0.3%, slower than the 1.1% seen over the second quarter reflecting the effect of some non-recurring revenue. Vodafone Business saw growth accelerate to 5.0%, driven by strong performance in digital services.
The group continues to consider consolidation in Italy with several potential parties, but confirmed nothing has been agreed.
Full-year guidance was reiterated, with underlying cash profit (EBITDAL) and underlying free cash flow expected around €13.3bn and €3.3bn respectively.
Our view
Vodafone's third quarter had some pockets of optimism for investors to cling to. Growth was in line with the second quarter, arguably a better result than some had feared. But the wider issues associated with recent lacklustre performance remain.
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 also been underperforming versus its peers. Service revenue growth and customer satisfaction in key areas like Germany, Italy and Spain have struggled to keep pace.
In response, Vodafone has an evolved strategy. There are job cuts, the merger of its UK business with Three UK, and the recently agreed sale of the underperforming Spanish division. The Italian division's next, with a deal on the table awaiting confirmation.
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, growing service revenue and customer numbers is proving a challenge. Vodafone was slow to adapt to changing regulations, and when it did, introduced a poor customer experience. There are further regulatory changes coming over this year which mean Vodafone needs to recontract over 8.5mn customers (c. €800mn in revenue).
Outside Europe, the Vodacom subsidiary has some exciting growth opportunities in Africa and is targeting mid-to-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 rose to €36.2bn over the first half, which is a little lofty for our liking. And while operating cash flow is stable, cash demands remain high. The Spanish sale, while a positive move for earnings given it's a loss-making region, will be a hit to free cash flow. A capital allocation review is on the cards post-completion, and some analysts are already pencilling in dividend cuts as a result. 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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