Vodafone turns 40 next year. But this FTSE 100 company is already in the throes of a midlife crisis.
Can the global mobile and broadband operator – which has been branded ‘too big, too slow and too complex’ – emerge leaner and more determined, refuting accusations of ‘corporate arrogance’ by some critics?
Or should investors beware?
Vodafone’s problems became even more apparent after the departure of chief executive Nick Read. Shares have fallen 22% in the past six months and almost 60% in the past five years. In the past few days, however, Bank of America has upgraded Vodafone to a “buy,” predicting a 42% share price rise over the next 12 months.
Intriguing, especially as the dividend yield is 8.4%, more than double the FTSE 100 average of 3.55%.
The telecommunications sector has been hit hard by rising interest rates and soaring energy costs. But Vodafone’s individual woes include falling revenue in Germany, its biggest market. The decline contrasts with growth at rivals Deutsche Telekom and Telefonica.
Vodafone is trying to tackle its cumbersome form.
This week it sold its Newbury headquarters and will lease part of the campus. But as Karen Egan, head of mobile at Enders Analysis, points out: “Vodafone is a bit of a tanker – it will take a while to turn around.
The first mobile call was made on the Vodafone network in 1995. But today the public tends to view mobile telephony as a utility rather than a technological marvel. Vodafone, which employs 104,000 people worldwide, is seen by some as particularly complacent.
Egan says: “Other operators like Orange and 02 seem hungrier.”
A new CEO must change these perceptions to revitalize the stock price.
CFO Margherita Della Valle fills the role, while headhunters locate a personality with the transformational powers investors crave. Among those at the center of speculation are Lutz Schuler, the German chief executive of Virgin Media O2, the telecoms closest thing to a rock star, and Liv Garfield, boss of water company Severn Trent. She was previously Managing Director of Openreach, the infrastructure arm of BT, where she oversaw the rollout of fiber broadband.
As the search for a managing director continues, two groups of activist investors – Cevian Capital and Coast Capital – have left.
They may have grown tired of waiting for Vodafone to implement obvious streamlining options like selling another part of its stake in the Frankfurt-listed Vantage Towers.
Vodafone sold part of this cell tower subsidiary last November when Vodafone formed a consortium with KKR, the US private equity group. Another possibility is a merger of Vodafone’s UK network with Three, which is owned by Hutchison.
Such potential deals could be the reason Abu Dhabi’s state-owned group E&, formerly Etisalat, has increased its stake in Vodafone. This investor can hope to benefit from the consolidation of the European telecoms sector, although new British security legislation allows the government to intervene in foreign takeovers that pose a risk to resilience in defence, digital and security. ‘energy.
Also on the front of the stage, Iliad, the French telecoms company, which made an unsuccessful offer last February for the Italian division of Vodafone. Iliad boss, billionaire Xavier Niel, has denounced Vodafone’s size and lack of flexibility. Very represented in the Gallic press with his companion Delphine Arnault, new boss of Christian Dior, Niel is not the only high-level French entrepreneur attracted by well-known telecommunications companies. Patrick Drahi, boss of Altice, owns 18% of BT.
Niel’s presence suggests that investing in Vodafone should provide, at least, entertainment. But the challenges are considerable. Richard Hunter of Interactive Investor comments: “Vodafone has net debt of over €45bn, European growth is tepid and the development of 5G capability comes at a huge price.”
Vodafone’s 5G coverage reaches 344 European cities.
But, as Hunter points out, the faster speeds provided by 5G could give Vodafone an advantage, and customers who have chosen the multi-play offer (broadband, landline and mobile) could prove more loyal.
Egan says anyone backing Vodafone should be ready for another share price reversal, if the new CEO makes an early statement, “kitchen sinking” all the company’s shortcomings.
But she is more optimistic about the dividend, saying: “It may seem to some the type of dividend that could be cut. But in my opinion it is sustainable as the big calls on Vodafone money are made.
I’m a long-term focused investor and like the occasional bet, which suggests Vodafone should appeal. But I’d rather wait to see the caliber of the new boss. Also, I’m an unimpressed customer. To offset the aggravation caused by poor connectivity, I would demand at least a 50% increase in share price.
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