Company Reports

Vodafone is a telecommunications conglomerate present in more than 20 countries around the world. Its most important markets are Germany and the United Kingdom. Vodafone has historically been a mobile player, but during the last decade it has carried out several deals to solidify its fixed-line presence. Vodafone is the owner of the cable network in Germany, thanks to the acquisitions of Kabel Deutschland (2013) and Liberty Global Germany (2019). These moves made Germany Vodafone’s largest market by revenue, a decision we support, given the historical price stability in this geography.

Swisscom announced it will be acquiring 100% of Vodafone Italia for EUR 8.0 billion in an all-cash deal. It represents a 7.8 enterprise value/EBITDA after leases multiple before synergies, and 5.1 times after its expected synergies are realized. The acquisition will be fully financed with debt, significantly raising Swisscom's net debt/EBITDA ratio from 1.5 times to 2.6 times. We remain highly skeptical about Swisscom's decision to add significant financial leverage to its balance sheet to enter a market with irrational competitive behavior and strong revenue and margin pressures. Based on our estimates, this deal is value-neutral to Swisscom at best, with a risk of value destruction if synergies are less than expected or competitive pressures intensify in Italy. The deal is still awaiting regulatory approval and is expected to close in the first quarter of 2025. We maintain our CHF 440 fair value estimate and narrow moat rating for Swisscom.

Vodafone’s group service revenue, excluding Turkey, grew by 2.8% in third-quarter fiscal 2024 as its revenue in Germany slowly improved. Despite Vodafone facing challenges in Germany, where it is steadily losing share to Deutsche Telekom, and in Italy, where the market remains highly competitive, we believe management is making some right decisions. It is trying to merge its U.K. business with CK Hutchison and divest from Spain. We believe the firm will continue to have a hard time in Italy after rejecting Iliad’s merger offer, which valued Vodafone Italy at EUR 10.45 billion. According to Reuters, Vodafone could now pursue a deal with Swisscom’s Italian business Fastweb. We believe Fastweb would have a lower potential for synergies with Vodafone though, given its smaller size compared with Iliad. We maintain our GBX 125 fair value estimate and see the shares as undervalued.

Vodafone is a telecommunications conglomerate present in more than 20 countries around the world. Its most important markets are Germany, Spain, Italy, and the United Kingdom. Vodafone has historically been a mobile player, but during the last decade it has carried out several deals to solidify its fixed-line presence. Vodafone is the owner of the cable network in Germany, thanks to the acquisitions of Kabel Deutschland (2013) and Liberty Global Germany (2019). These moves made Germany Vodafone’s largest market by revenue, a decision we support, given the historical price stability in this geography.

Vodafone’s results were not particularly good in our view as adjusted EBITDA after leases declined strongly in its four core markets, largely hit by energy prices. Italy and Spain had organic declines of 11.6% and 15%, respectively, while Germany and the U.K. had declines in the 5% range. Adjusted EBITDAaL managed to increase 0.3% organically though due to high revenue growth in Turkey and cost reductions at Vodafone’s headquarters. We're adjusting our medium-term forecasts because we think Vodafone will slightly miss its guidance for fiscal 2024 and slightly trim our margin forecasts for the next 5 years. We maintain our GBX 125 fair value estimate, but will remain vigilant for any signs that might indicate a further fundamental deterioration.

Spanish newspaper Expansion reported on Sept. 22 that no-moat Vodafone is looking to sell a 50% stake in its Spanish business to British investment company Zegona, which specializes in telecommunication investments. On Sept. 22, Zegona confirmed the report. According to the report, Zegona could buy up to a 50% stake and value the Spanish unit at around EUR 5 billion. This would represent a valuation of around 5 times EBITDA after leases, which we consider reasonable given the challenges Vodafone faces in Spain. We are not surprised by this announcement given Vodafone’s new CEO Margherita Della Valle indicated in May that the company was considering strategic options for the Spanish business unit. We maintain our GBX 125 fair value estimate.

Vodafone’s start to the year was characterized by slight improvements in its service revenue growth compared with last quarter, although most of its largest European markets continue to see low-single-digit organic declines. Group revenue increased by 3.7% organically, although this was a 4.2% decline in reported terms, mainly due to foreign-exchange headwinds in Turkey and Africa. In Germany (30% of sales) service revenue declined by 1.3% (2.8% decline last quarter) as the operator continued to lose some customers after changes in German regulations. This was partially offset by price increases in broadband. Unsurprisingly, Italy and Spain saw 1.6% and 3.0% organic declines, given the intense competition in the mobile market, which we have seen for many years. Although Vodafone is not having its best moment this is considered in our forecast, which remains in line with company-compiled consensus for fiscal 2024, but more conservative in the medium term. We maintain our GBX 125 fair value estimate.

Vodafone is a telecommunications conglomerate present in more than 20 geographies around the world. Its most important markets are Germany, Spain, Italy, and the United Kingdom. Vodafone has historically been a mobile player, but during the last decade it has carried out several deals to solidify its fixed-line presence. Vodafone is the owner of the cable network in Germany, thanks to the acquisitions of Kabel Deutschland (2013) and Liberty Global Germany (2019). These moves made Germany Vodafone’s largest market by revenue, a decision we support, given the historical price stability in this geography.

Vodafone and CK Hutchison (Three UK) announced the merger of their mobile businesses in the U.K. Vodafone will own 51% of the new entity, with an option to buy CKH’s stake if the enterprise value of the merged business increases to at least GBP 16.5 billion. This move, if approved by the Competition and Markets Authority, or CMA, would reduce the number of mobile operators from four to three in the U.K., consolidating the market and allowing the merged entity to earn better returns on invested capital, or ROIC. Vodafone and Three UK have had poor ROICs historically due to lack of scale. We are maintaining our fair value estimates for Vodafone and CK Hutchison.

No-moat Vodafone's shares are down 4% at the time of the writing as the company missed its full-year targets, with adjusted EBITDAaL coming in at EUR 14.7 billion compared with guidance of EUR 15.0 billion to 15.5 billion. We maintain our GBX 125 fair value estimate as our fiscal 2023 forecast was already below the EUR 15.0 billion target and our model also assumes almost EUR 500 million annual expenses that management considers nonrecurring.

Vodafone’s service revenue grew organically by 1.8% in its third fiscal quarter, but only thanks to its African operations, which grew by 3.5% compensating for a 1.1% decline in Europe. We remain at the lower end of management guidance of EUR 15.0 billion to EUR 15.2 billion in adjusted EBITDA (after leases) for the fiscal year ending in March 2023. We maintain our GBX 125 fair value estimate.

We are lowering our Vodafone fair value estimate to GBX 125 from GBX 135, after the company reported weaker-than-expected results in the first half of the fiscal year. Headwinds are mainly coming from Germany and Italy. In Germany, Vodafone has underperformed during the past six months. This is a company-specific problem rather than an overall market deterioration, as Deutsche Telekom and Telefonica O2D reported healthy results a few weeks ago, with organic service revenue growth of 2.7% and 3.7%, respectively. The company attributed the weaker results in Germany to commercial underperformance and some revenue pressures. The Italian business also performed weakly, with EBITDA after leases, or EBITDAaL, declining 6.6% organically in the first half of the year. Telecom Italia also reported strong EBITDAaL declines last week as the Italian market remains highly competitive. We have trimmed our margin and revenue assumptions in Germany and Italy for 2023, resulting in the fair value estimate decline. Our adjusted EBITDAaL forecast for this fiscal year remains in the lower end of management’s guided range, around EUR 15.0 billion.

Vodafone is a telecommunications conglomerate present in more than 20 geographies around the world. Its most important markets are Germany, Spain, Italy, and the United Kingdom. Vodafone has historically been a mobile player, but during the last decade it has carried out several deals to solidify its fixed-line presence. Vodafone is the owner of the cable network in Germany, thanks to the acquisitions of Kabel Deutschland (2013) and Liberty Global Germany (2019). These moves made Germany Vodafone’s largest market by revenue, a decision we support, given the historical price stability in this geography.

Vantage Towers has received a takeover offer from Vodafone, Vantage’s majority shareholder (81.7% stake), and private equity funds KKR and Global Infrastructure Partners, for EUR 32 per share. The takeover price represents a 10.3% premium to our previous EUR 29 fair value estimate. We are raising our fair value estimate for Vantage Towers to EUR 32 per share from EUR 29, based on a 100% probability of the deal going ahead. We are maintaining our GBX 135 fair value estimate for Vodafone. We believe minority shareholders in Vantage are getting a fair price for their shares, with the business being valued at 26 times the enterprise value/2022 EBITDA (after leases), a multiple in line with recent transactions across the European tower sector.

Vodafone seems to be advocating for a new potential wave of consolidation among European telecom operators. Vodafone started the week by announcing it intends to merge its U.K and Portugal business units with CK Hutchison and Nowo, respectively. Orange and MasMovil have also been attempting to merge in Spain since July. We remain cautious about these potential mergers and acquisitions until regulatory approval is granted, given how rigid regulators were over the past decade, blocking many deals (in the U.K, France, and Denmark) or imposing remedies that wrecked the initial purpose of the merger (Italy in 2018). We maintain our no moat rating and GBX 135 fair value estimate for Vodafone.

No-moat Vodafone's first-quarter trading update came with no big surprises. Germany (30% of sales) was the weakest performer, with a 0.5% organic sales decline due to customer losses caused by changes in the German telecommunications act. According to prior legislation, housing associations could include broadband and TV services as part of their mandatory charges to tenants, with Vodafone being the default service provider in these contracts. The new law does not enforce this anymore, and tenants are now free to choose their telecommunications provider, something that has led to customer losses for Vodafone that we expect to remain during the following quarters. Vodafone lost 64,000 fixed-line subscribers in the quarter compared with a gain of 7,000 one year ago, resulting in a 0.5% decline in service revenue compared with 1.4% growth last year. We are maintaining our GBX 135 fair value estimate.

Vodafone is a telecommunications conglomerate present in more than 20 geographies around the world. Its most important markets are Germany, Spain, Italy, and the United Kingdom. Vodafone has historically been a mobile player, but during the last decade it has carried out several deals to solidify its fixed-line presence. Vodafone is the owner of the cable network in Germany, thanks to the acquisitions of Kabel Deutschland (2013) and Liberty Global Germany (2019). These moves made Germany Vodafone’s largest market by revenue, a decision we support, given the historical price stability in this geography.

We are relaunching coverage of Vodafone and downgrading our moat rating to none from narrow. Although Vodafone is competitively advantaged in Germany (its main market) and other minor European geographies, we believe its Italian and Spanish divisions are value-destructive. While the United Kingdom is not destructive, it remains a highly competitive market. We are reducing our fair value estimate to GBX 135 per share from GBX 185 to account for the moat downgrade and more conservative revenue assumptions.

Vodafone delivered reasonably solid financial results to end fiscal 2022 even as it continued to struggle operationally in Germany. Management has yet to deliver the sort of transformational transaction in Europe that investors and we have hoped for, but commented that numerous discussions remain ongoing. For fiscal 2023, the firm expects inflation and other pressures will offset modest revenue growth, resulting in roughly flat free cash flow. Vodafone still has a way to go in reshaping its operations, but we continue to believe the market has overly discounted the value of its assets, as our GBX 185 fair value estimate reflects.

Though Vodafone has made moves to improve its position over the past several years, the firm has still struggled to grow amid challenging competitive situations in Spain, Italy, and the U.K., which collectively contribute about a third of total service revenue. We believe Vodafone’s assets in these countries hold substantial value. Recent steps to separate tower infrastructure from the operating company and form network sharing agreements should help improve profitability, but we’re more pleased to see that Vodafone and its rivals finally seem serious about restructuring these markets. While regulators will certainly weigh in on any proposed consolidation, we expect Vodafone will continue moving in the right direction.