Vodafone M&A spree leaves German problem untouched
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Johnson
LONDON, Nov 12 (Reuters Breakingviews) -Incoming CEOs don’t get a handbook for reviving a struggling company. But if they did, it would probably say something like: sell off or merge subscale businesses to focus on core markets, while being honest with investors about the scale of the task at hand. This has roughly been Margherita Della Valle’s approach since she took over Vodafone VOD.L on a permanent basis 18 months ago, yet the group’s shares have trailed those of rivals. It all comes down to Germany.
Della Valle, a former finance chief at the 22-billion-euro telecom group, went on an overdue M&A spree after taking the top job early last year. She struck a long-awaited merger with CK Hutchison’s 0001.HK UK unit Three, agreed to sell the company’s Spanish division, and this year offloaded Italy. The effect has been to focus on the key German market, which makes sense in theory, but has backfired in the short term given a deterioration in that business. Vodafone has been warning that a Teutonic law preventing landlords from bundling TV bills with rental costs, which went into effect in July, would prove problematic.
And so it has. Revenue in the German unit fell 6% year-on-year in the most recent quarter. After a 6% share-price fall on Tuesday, the company’s stock is down by a quarter since Della Valle’s permanent appointment in April 2023, compared with a 6% rise for the STOXX Europe 600 Telecom Index. Vodafone trades at 10 times forecast earnings over the next 12 months, according to Visible Alpha, compared with European rivals’ average multiple of 12.6.
The question is how quickly Vodafone can start growing again in Germany. Della Valle is hoping to do so at some point in the next financial year, which ends in March 2026. She’ll get a lift from an influx of new mobile customers thanks to a deal with smaller peer 1&1, which will eventually see 11 million customers move to Vodafone’s 5G mobile network. Sustaining the momentum may be tough. Rival Deutsche Telekom DTEGn.DE is ramping up its rollout of full-fibre broadband across Germany, which could boost competition in the market for superfast internet.
Shedding the Germany discount could be worth a lot to Della Valle. Closing the price-earnings gap with rivals would boost the shares by roughly a third, based on Breakingviews calculations. The benefits of future cost savings from the UK merger could add a further boost over time. Della Valle has played a bad hand well at Vodafone, but the payoff will take a while to show up.
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CONTEXT NEWS
Vodafone on Nov. 12 reported a 6% year-on-year drop in revenue in Germany during the three months to the end of September. The company’s shares were down 5.6% to 68.94 pence as of 1109 GMT.
Graphic: Vodafone shares vs. index under Margherita Della Valle https://reut.rs/4fsKuYc
Editing by Liam Proud and Oliver Taslic
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