Investors hanging up on Vodafone as new chief’s strategy raises questions

Vodafone’s new boss, Margherita Della Valle, would have been forgiven for putting investors on hold for just a little longer.

But, instead, the Italian native, who was only formally appointed chief executive three weeks ago, having been a caretaker chief executive since January, came out early with a half-cooked strategic vision this week that has raised more questions than answers.

The company veteran of three decades may have got headlines signalling that she was all about action, by unveiling plans to axe 11,000 jobs — or more than 10 per cent of its workforce — and warning that the group “must change”.

Shares in Vodafone fell as much as 10% during the week to a low of 81p, a level last seen in 1997

That was after Vodafone reported weak earnings for its core German, UK and Italian markets for the year to the end of March and forecast that its free cash flow, a closely watched figure, will amount to €3.3 billion in its current financial year — some 8 per cent below what the market had been expecting.

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However, investors hoping for a real turnaround strategy, following a frustrating four-year period in which the stock lost almost half of its value as the previous incumbent Nick Read struggled to deliver growth, were left disappointed.

Instead, they were told that Vodafone had started a “strategic review” of its Spanish business, while hopes in some quarters of a break-up of the business were dashed, with the company affirming its commitment to its 65 per cent-owned African unit, Vodacom. (While Vodacom is performing better than many parts of the group, analysts argue that investors can buy shares in that company directly on the Johannesburg Stock Exchange.)

[ Vodafone plans 11,000 job cuts globally ]

Shares in Vodafone fell as much as 10 per cent during the week to a low of 81p, a level last seen in 1997 —as more investors hung up on the company.

The telecoms industry in Europe has seen average revenues per user drop in the past decade, as it lost ground to over-the-top platforms like WhatsApp and Skype while being forced to invest in fourth- and fifth-generation mobile spectrum and fibre networks to maintain subscribers.

While Vodafone’s German business, by far its biggest unit, is struggling, many analysts still say that the only way to boost shareholders is for the company to focus on driving consolidation in European markets

That has left the average net debt mountain in the sector at two times operating profits — twice as high as the broader corporate sector, according to Dutch bank ING — at a time of rising borrowing costs. Vodafone’s €33.4 billion of net borrowings stood at 2.5 times earnings before interest, tax, depreciation, amortisation and leases. (That’s even before you get into the off-balance sheet stuff in joint ventures.)

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This week’s stock low point was more than 70 per cent below the price at which almost 500,000 Irish investors received shares in the mobile phone carrier 22 years ago this month when it took over Eircell from Eircom (now Eir).

To this day, it remains the most widely held stock in the Republic, estimated to be comfortably still in the hundreds of thousands. However, a spokeswoman declined to say how many Irish shareholders remain on the group’s register.

“In short, we think Vodafone is becoming uninvestable,” said John Karidis, an analyst with Numis, who lambasted Della Valle and the board for failing to give any financial targets this week to describe what they think “success” might look like two to three years from now.

[ Vodafone appoints finance head Margherita Della Valle as permanent chief executive ]

Barclays analyst Maurice Patrick concluded after an analyst call with Vodafone on Tuesday that the company’s general talk about its plans to drive “an improved customer experience, improved operational performance and improved returns” amounted to a tacit admission that the company sees the need to invest to deliver growth over time. And that there are no quick fixes.

Under Read and his predecessor, Vittorio Colao, Vodafone has spent the past dozen years unpicking much of its expansionist past — selling minority stakes in phone companies in the likes of Japan, China, and the US and writing down the value of its minority-held troubled Indian operations to zero — to focus on its core European and African business.

But they weren’t averse to using the corporate chequebook — agreeing five years ago, when Caloa was still in charge and Read his finance chief, to buy the German and eastern European cable networks of US billionaire John Malone’s Liberty Global for almost $22 billion (€20.4 billion).

Trevor Green, head of UK equities at Aviva Investors, a top 20 Vodafone shareholder, described the deal late last year as a “hospital pass” as the group inherited a highly-indebted business that would subsequently be forced to commit to investing heavily to upgrade its old-fashioned cable network to fibre to keep up with the competition.

[ How can Vodafone justify a price hike of more than 11%? ]

While Vodafone’s German business, by far its biggest unit, is struggling, many analysts still say that the only way to boost shareholders is for the company to focus on driving consolidation in European markets.

That would involve shoving some units into stock-based tie-ups, to create synergies — and selling others to those pushing to consolidate other markets.

Swedish activist investor Cevian was pushing this agenda when it declared a stake in the company early last year. However, it dumped its shares in the company in January as it grew tired of waiting.

While the group has been in talks for at least a year to combine Vodafone UK with Three UK, Della Valle offered little hope this week that a deal was imminent

Vodafone was outmanoeuvred in Spain when Orange and MasMovil agreed to merge in July. And while the group has been in talks for at least a year to combine Vodafone UK with Three UK, Della Valle offered little hope this week that a deal was imminent.

Still, there have been reports recently that deal talks between Vodafone Italia and majority Eir owner Xavier Neil’s Iliad Group are back on, after Vodafone rejected an €11 billion offer from the French man for its Italian business early last year.

Meanwhile, Vodafone’s board decided this week to leave its final dividend unchanged, resulting in a €2.5 billion — or 9 cents per share — payout. But with the stock now trading at a dividend yield of more than 10 per cent, it suggests investors believe Della Valle will be wielding a red pen when deciding next year’s payout.