Vodafone could be ripe for shake-up by activist investor Elliott Management
Elliott has taken a stake in Vodafone as it battles intense competition in Europe and is taking over Liberty Global’s German and eastern European businesses
London — A weak share price, a fragile dividend and a switch of CEOs: conditions at Vodafone Group may be ripe for a shake-up by US activist investor Elliott Management.
A report that Elliott has taken a stake in the world’s second-largest wireless carrier comes at a critical time for Vodafone, which is battling intense competition in Europe and trying to rescue its share price from an eight-year low.
Outgoing CEO Vittorio Colao spent the past decade shifting Vodafone from a predominantly mobile carrier with sprawling global investments to one that is more focused on Europe and also offers bundled internet services. This has required investing in fibre networks and has put pressure on the company’s ability to return cash to shareholders.
Keeping those shareholders on side is a top priority for Nick Read, who succeeds Colao in October, and who is charged with seeing through a $22bn take-over of Liberty Global’s German and eastern European businesses.
Representatives for Vodafone, the parent of JSE-listed Vodacom, and Elliott declined to comment.
What might Elliott want Read to do instead?
This would be the most compelling path for Elliott because it’s the simplest way to cover the dividend and pay down debt quickly at the same time, Berenberg analyst Usman Ghazi said in a note to clients on Tuesday. This would address the disconnect between investors — who worry leverage will creep up as profits stagnate and expensive airwave auctions also sap cash — and management, who say debt will be paid off because earnings are set to grow.
Selling 50,000 of Vodafone’s roughly 110,000 phone towers and masts at levels similar to recent sales could net the company €12.5bn, enough to pay down 40% of its almost €32bn debt pile, Ghazi wrote. This could also save on maintenance and upgrade costs as the sector advances into faster wireless technology.
If Vodafone bought back its own depressed shares, it would also help pay for shareholder returns, creating more value for less risk than the mega-deal announced in May to snap up Liberty Global’s units, Bank of America analyst David Wright said in a note to clients Monday.
To pay for it, Vodafone would have to consider pulling out of the pact, which has a break-up fee of €250m. Elliott previously pushed for buybacks in the case of Bezeq Israeli Telecommunication.
Vodafone has assets dotted around the world that Elliott could pressure it to sell. Each comes with unique complications, according to Ghazi. Vodafone has the right to float its stake in its joint venture with Liberty Global in the Netherlands, VodafoneZiggo, for instance — but only after 2019, with transfers to third parties barred for a year after that.
Meanwhile, the group’s South African and Egyptian units contribute to synergies —SA is "one of Vodafone’s best assets", Ghazi said, and uncertainty around markets and politics in India and Turkey would make those units tricky to offload.
Roll back fibre
Elliott could lobby Vodafone to scale back investments in building out its own fibre networks, instead using its size and influence to get better wholesale deals, according to Erhan Gurses, an analyst at Bloomberg Intelligence. That may help Vodafone better cover its dividend, he said. "Vodafone has a very high dividend yield, suggesting there are concerns in the market. Elliott would see an opportunity there."
Telecoms aren’t new to Elliott: the New York-based hedge fund recently claimed victory in a shareholder struggle for control of one of Vodafone’s competitors, Telecom Italia, in a bid to sell assets and re-introduce its dividend. In May, the Italian former monopoly’s investors backed Elliott president Paul Singer’s proposal to overhaul the board, marking his company’s first ever proxy win and a major defeat for its biggest shareholder, French media conglomerate Vivendi.