Vodafone: Negotiations Underway to Divest 50% of Its Spanish Business Unit for EUR 5 billion

Spanish newspaper Expansion reported on Sept. 22 that no-moat Vodafone VOD 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.

We believe this is positive news for shareholders and we like that Vodafone is aiming to make more mergers and acquisitions. We believe Vodafone’s geographic portfolio of businesses is too broad, exposing the company to heterogeneous competitive dynamics and currencies (Western Europe, Eastern Europe, and Africa), which blurs cash flow visibility. We would like Vodafone to follow a similar path to the one Telefonica has taken in Latin America, with the latter being very active in divesting businesses and networks and creating a leaner organization. In Europe, Spain and Italy remain two of Vodafone’s most challenging businesses given the irrational price environment, especially on the mobile front. Zegona has a “buy-fix-sell” strategy, according to the company’s website, so we expect further cost reductions in Vodafone Spain if the deal goes ahead. Vodafone is also attempting a merger with CK Hutchison in the United Kingdom.