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Vodafone will celebrate its 40th anniversary next year. But this FTSE 100 company is already in the throes of a midlife crisis.
Can the global mobile phone and broadband operator – which has been labeled “too fat, too slow and too complex” – get leaner and more purposeful, countering some critics’ accusations of “corporate arrogance”?
Or should investors be wary?
Vodafone’s problems have become even more apparent after the departure of CEO Nick Read. Shares are down 22 percent in the past six months and nearly 60 percent in the past five years. In recent days, however, Bank of America has upgraded Vodafone to a “buy,” forecasting a 42 percent rise in share price over the next 12 months.
Intriguing, especially as the dividend yield is 8.4 percent, more than double the FTSE 100 average of 3.55 percent.
The telecom sector has been hit hard by higher interest rates and rising energy costs. But Vodafone’s individual problems include declining revenues in Germany, its largest market. The decrease contrasts with the growth at competitors Deutsche Telekom and Telefonica.
Vodafone is trying to tackle its unwieldy form.
This week it sold its headquarters in Newbury and is renting back part of the campus. But as Karen Egan, head of mobile at Enders Analysis, points out, “Vodafone is a bit of a tanker – it’s going to take a while to turn around.”
The first mobile call took place on the Vodafone network in 1995. But today the public sees mobile telephony as a tool rather than a technological marvel. Vodafone, which employs 104,000 people worldwide, is seen by some as extremely complacent.
Egan says, “Other operators like Orange and 02 seem hungrier.”
A new CEO must change such perceptions to revive the stock price.
Chief Financial Officer Margherita Della Valle fills the role, while headhunters find a figure with the transformational powers investors crave. Among those at the center of the speculation are Lutz Schuler, the German CEO of Virgin Media O2, the closest telecoms come to a rock star, and Liv Garfield, boss of water group Severn Trent. She was previously CEO of Openreach, BT’s infrastructure division, where she oversaw the roll-out of fiber broadband.
As the search for a CEO continues, two sets of activist investors – Cevian Capital and Coast Capital – have left.
Perhaps they are tired of waiting for Vodafone to implement obvious rationalization options, such as selling another portion of its stake in the Vantage Towers, which are listed on the Frankfurt Stock Exchange.
Vodafone sold part of this cell tower subsidiary last November when Vodafone formed a consortium with US private equity group KKR. Another possibility is a merger of Vodafone’s UK network with Three, which is owned by Hutchison.
Such potential deals may be why state-owned Abu Dhabi group E&, formerly Etisalat, has increased its stake in Vodafone. This investor may be hoping to benefit from consolidation in Europe’s telecoms sector, although new UK security legislation allows the government to intervene in foreign acquisitions that pose a risk to resilience in defence, digital and energy.
Also still present is Iliad, the French telecom company that made an unsuccessful bid for Vodafone’s Italian division last February. Iliad’s boss, billionaire Xavier Niel, has spoken out about Vodafone’s size and lack of flexibility. Widely pictured in the Gallic press with his partner Delphine Arnault, Christian Dior’s new boss, Niel isn’t the only high-profile French entrepreneur drawn to well-known telecom companies. Altice boss Patrick Drahi owns 18 percent of BT.
Niel’s presence suggests that investing in Vodafone should at least provide some entertainment. But the challenges are significant. Interactive Investor’s Richard Hunter comments: ‘Vodafone has net debt of more than €45 billion, European growth is lukewarm and the development of 5G capabilities comes with a huge price tag.’
Vodafone’s 5G coverage reaches 344 European cities.
But, as Hunter points out, the faster speeds of 5G could give Vodafone an advantage, and customers who opted for the multiplay offering (broadband, fixed line and mobile) could prove more loyal.
Egan says anyone who supports Vodafone should be ready for another reversal when the new CEO makes a debut statement, “rejecting” all the company’s shortcomings.
But she’s more bullish on the dividend, saying, “It might seem like the kind of dividend to some that could be cut.” But in my opinion it is sustainable because the heavy demand on Vodafone’s cash is a thing of the past.’
I’m a long-term investor who likes to take a chance every now and then, which suggests that Vodafone should appeal. But I prefer to wait until I see the caliber of the new boss. I am also an unimpressed customer. To offset the annoyance caused by poor connectivity, I’d demand at least a 50 percent increase in stock price.
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