Vodafone cuts outlook as economic woes mount

Vodafone Group Plc shares fell as much as 9.2 per cent, putting them on track to close at their lowest levels since 1997.

Tuesday’s fall was triggered by the telecommunications group warning of poor sales in key markets, soaring power costs and tough competition.

Vodafone expects powering its vast internet infrastructure of mobile antennas and streetside broadband cabinets to cost €500 million more next year than this year, it said in slides accompanying half-year results on Tuesday. That’s on top of a €300 million increase for the current year over the prior period.

Energy inflation has hit phone groups across the continent. But analysts pointed to some of Vodafone’s specific operational woes as reasons for Tuesday’s sell-off, such as worse-than-expected sales in Germany – its biggest market – and in Italy.

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The results “don’t really make for pretty reading,” New Street Research analyst James Ratzer told clients in a note. Goldman Sachs analyst Andrew Lee said investor sentiment would likely be dominated by interpretations of the German outlook and that service revenue growth in the country may worsen before it improves.

Vodafone shares were trading down 6 per cent to 97.8 pence at in London, giving the company a market capitalisation of £26.8 billion (€31.8 billion). They haven’t closed that low since November 1997, though they have briefly traded lower intraday in the intervening 25 years.

Vodafone isn’t unique among peers, with most European phone groups having lost value over the past two decades. But that hasn’t been enough to reassure high-profile investors, such as activist Cevian Capital, which sold down most of its stake earlier in the year after rising interest rates undermined its investment thesis.

In an attempt to reverse the decline and pay down a €45.5 billion debt pile, chief executive Nick Read has pledged to reshape the group through big deals. Last week he agreed to sell private equity a large stake in mobile-mast business Vantage Towers, and he’s in talks to merge Vodafone’s UK arm with CK Hutchison’s Three UK. He recently signed a deal to merge with a rival in Portugal, and since taking over has also sold operations in Hungary, New Zealand and Malta.

For now, Vodafone has adjusted its outlook to the low end of a previous range, cut its cash-flow guidance and launched a fresh cost savings plan. It will cut more than €1 billion by 2026 “through streamlining and simplifying our group-wide structure and further accelerating the digitalisation of our operations,” Vodafone said in an earnings statement on Tuesday.

“In terms of redundancies, of course when we drive efficiency improvements, productivity improvements, digitalisation, there are impacts on some job roles,” Read added on a call with reporters.

Second-quarter organic service revenue growth was 2.5 per cent, compared with an average estimate of 2.3 per cent from analysts in a Bloomberg survey, as growth in the UK offset falls in Germany, Italy and Spain. Adjusted free cash flow will be about €200 million lower than previous guidance, the company said.

It expects adjusted full-year adjusted earnings of between €15 billion to €15.2 billion before interest, taxes, depreciation and amortisation after leases. That removes upside from previous guidance, which set out a range of €15 billion to €15.5 billion. – Bloomberg