Vodafone has established itself as one of the biggest mobile and fixed line providers in the world and deals in recent years have seen them operate throughout the US, Europe, Africa, Asia and Australasia. The comms giant provides known mainly for their retail mobile network service that operates in over 25 countries, also provides fixed line services like high speed broadband as well as business solutions. Expansion and development has been a blessing and curse for Vodafone in recent times as whilst they have recently completed deals to place them as leaders within many vast territories including India, Australia and Europe, these mergers and acquisitions have taken time with regulatory issues and have cost £billions to undertake, both of which have taken their toll on the share value. Expansion for Vodafone is an ongoing process and they are currently front runners in many global areas to be the first, and in some cases only, providers of new technology solutions such a Giga-Fast broadband and 5G networks. The global coverage and digital development that Vodafone are famous for has been achieved through their boldness in the M&A department and their ability to merge, make and brake partnerships on a global scale. Historically, one of the key features investors have relied on Vodafone for, is their commitment to pay regular and increasing dividends year on year.
Recent Developments and Deals
In the past week alone, mergers were completed in both India and Australia to ensure they would not be locked out of market due to the size of the leading competitors. In India, the merger with Idea was needed to ensure they didn’t lose further ground to local comms companies Reliance Jio and Bharti Airtel, and whilst the deal had to handle several regulatory issues, it has now been passed. The deal with TPG Telecom in Australia has seen the newly merged company secure a place as one of the leading providers down under. Both of these deals come off the back of the purchase of Liberty Global’s cable assets in throughout Europe, including Germany, Czech Republic, Romania and Hungary. Like the Indian and Australian deals, the Liberty Global acquisition has led to Vodafone being a rival to the German national firm, Deutsche Telekom. The deals in Germany and Australia also place them in pole positions to be the first network provider to place the infrastructure for 5G networks and Giga-Fast broadband in the territories. The recent deals were necessary in order to remain leaders within each region, but they all came with billions of debt that will need to be addressed by the Vodafone board, especially as they will likely be seeking to maintain their dividend pay-out and growth. Whilst some of the debt can be addressed from the projected growth in business in the area, others, like the Australian deal, will see Vodafone handle the debt by shifting it to the new company and service it via divided payments while also guaranteeing it. This practice will also encourage the new company to pay a higher dividend in order to facilitate the arrangement.
A Troubling 2018 for the Share Value
Despite the growth, bright future and completion of M&A deals that 2018 has brought, many investors will be more concerned about the falling value of Vodafone’s share price in the same time period. As alluded to previously, the new projects completed and undertaken by Vodafone have piled on debt to the company and the projected profits they will be bring are more in the long term view. Investors will have noticed that in the year to date, Vodafone has underperformed the FTSE by over 25% (excluding dividends).
There has also been a change in leadership at Vodafone this year, which can quite often knock the share value. On the day that former boss, Vittorio Colao, announced his decision to stand down, shares fell by nearly 4% alone, and while his replacement, Nick Read, is an inside man this didn’t do much to ease the transition in terms of price. Read had been groomed for the job. He joined Vodafone in 2001 leading the UK, African, Asian and Middle Eastern side of the business, before being promoted to CFO in 2014. Another factor weighing down on the share value is the growing cost of investment in infrastructure and mobile services. Again, Vodafone being cut down by its own growth.
As new boss, one of Nick Read’s first tasks in the role will be to come up against activist investors such as Elliott which owns a significant stake in the €38bn company and will likely begin applying pressure on the board if the dividends are not increased and the current estimate of €5.2bn of free cash for Vodafone would not cover the cost to increase nor cover the flat dividend payment. Added income will become available to Vodafone in time through their expansion allowing restructuring, cost cutting and increased profits, however a quicker solution is likely to be needed. One asset that can quickly be called upon by Read would be to sell some or all of the signal towers that Vodafone own. Despite the increased cost in having to lease the towers back, it would be a big cash injection into the company and aide bringing down debt both of which would make this and future dividend payments far more realistic and ease concern of investors.
With some of these factors in mind, including the recent drop in share value, Vodafone has received a Buy recommendation from Citigroup with a target price of 190.00 as well as an Outperform recommendation from Bernstein this week. At the time of writing, Vodafone currently sits at 166.96 and with the recent recommendations, opportunity for growth and for an increased dividend, it would be entirely reasonable for any investor currently holding Vodafone stock to hold and potentially increase their stake prior to any growth in value or payment made.
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