Analysis: Vodafone's new CEO faces tough calls to reconnect with investors

Hutchison Telecommunications Hong Kong Holdings

21/05/2023 06:00

By Kate Holton and Paul Sandle
       LONDON, May 21 (Reuters) - When Vodafone named
Margherita Della Valle as CEO last month, investors adopted a
wait-and-see approach to whether the company veteran was the
right person to jolt it out of a deep malaise.
    Within weeks, Della Valle gave them a stark assessment of
the problems Vodafone faces. The reaction has been brutal, with
the company's shares sliding to 20-year lows.
    Della Valle, an Italian who joined Vodafone in 1994 and had
been its chief financial officer since 2018, vowed on Tuesday to
cut 11,000 of 90,000 jobs and speed up the delivery of new
offers by giving local country bosses greater autonomy.
    Her verdict on the situation in which Vodafone now finds
itself has amplified calls for deals to overhaul key markets and
for an improvement in the way it operates. 
    Complicating matters is an investor base with conflicting
demands, concerns about Vodafone's dividend outlook and a
workforce reeling from the deep job cuts.
    "They're fighting too many battles on too many fronts, with
still too much debt on the balance sheet," said investment
director Russ Mould at AJ Bell, adding that the share price is
reflecting concern around the dividend.  
    The British group remains one of the world's biggest
telecoms companies, with a presence across Europe and Africa,
but several years of underperformance versus peers had prompted
some investors and analysts to call for an external hire as CEO.
    While many observers in and outside the company had expected
a fresh face, Della Valle won over the board. 
    This week she vowed to put a greater emphasis on Vodafone's
enterprise division, long a strength, where she believes it can
grow share in an expanding market as consumers look for
ever-cheaper deals.  
    Vodafone's shares are trading at lows last seen in 2002,
largely due to a cut to free cash flow forecasts.
    "With the shares now yielding north of 9%, it is clear that
Vodafone is a dividend stock incorporating the expectation of a
dividend cut," Enders Analysis told clients.
    Della Valle dismissed concerns over net debt, which Vodafone
has lowered to 33.4 billion euros ($37 billion), giving it a 2.5
times net debt to core earnings multiple on a pro-forma basis.
    "This puts any concerns about our debt levels firmly behind
us," she said.      
    
          
    DIFFERENT DEALS 
    Vodafone made its name by often audacious dealmaking, and
once had presences across Europe, Africa, Australia, India and
the United States. 
    It has since retrenched but is now under pressure to go
further and either exit or seek mergers in some European markets
such as Spain, where it has begun a strategic review and is open
to structural change like a sale or a network separation.
    Della Valle said deals were a priority, but would not give
any timing, and defended the structure of Vodafone, which has
three major shareholders which could benefit from a break-up.
    Getting deals done is proving difficult. 
    Talks to merge its British business with the UK arm of
Hutchison, which it confirmed in October, are ongoing. 
    Meanwhile, its debt, a low share price and the structure of
Vodafone all add complexity. Investor frustration with the speed
of change led to Della Valle's predecessor Nick Read stepping
down in December.  
    One large, long-term institutional investor said Vodafone
had decent assets but needed to deliver greater value.
    An investment banker who has previously worked with Vodafone
said the new CEO had done a good job of committing to making
changes without tying herself to a timeframe, when it is still
not clear how competition regulators would respond.
    The rationale for owning assets around the world actually
makes more sense now, when enterprise clients want joined up
services in areas such as Internet of Things, the banker added. 
    Complicating its room for manoeuvre is Vodafone's
shareholder base, where Emirati telecoms firm Etisalat  EAND.AD 
has built up a 14.6% stake and said it will not go beyond 25%.
It has also recently secured a board seat.
    Enders said the current stake would prevent other takeovers
but it meant Etisalat's e& "appears to be in the strategic
driving seat" and championing an "empire-building approach". 
    That may not sit well with Vodafone's other key investors -
French telecoms billionaire Xavier Niel, who competes with it in
Italy, and Liberty Global, its partner in the Netherlands. Both
are known for their savvy dealmaking. 
    The banker said for someone like Niel, the shareholding was
a way to exert pressure on Vodafone as it seeks market change. 
    When Vodafone appointed Della Valle it praised her "pace and
decisiveness", and despite the tough outlook she won plaudits
for her handling of the results, delivering Tuesday's 
presentation alone because she does not yet have a finance
director.
    The cure, she said, was fundamental change - but that would
take time. 
    
    
  ($1 = 0.9084 euros)    

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Vodafone shares have lagged rivals    https://tmsnrt.rs/3MGZ6qE
Vodafone dividend yield spikes    https://tmsnrt.rs/42RnvQ8
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 (Additional reporting by Sarah Young; Editing by Alexander
Smith)
 ((kate.holton@thomsonreuters.com; 0044 207 542 8560; Reuters
Messaging: kate.holton.thomsonreuters.com@reuters.net))