Vodafone to sell Spanish unit to Zegona for €5bn

London — Vodafone will sell its Spanish business to Zegona Communications for €5bn in the second major deal by its new CEO to revamp a company struggling with little growth in mature markets.

Vodafone CEO Margherita Della Valle, who has vowed to reshape the UK telecom group to make it more profitable, said the sale would enable it to focus on markets with “sustainable structures and sufficient local scale”.

London-listed Zegona, chaired and managed by telecom executive Eamonn O’Hare, has previously bought and sold assets in Spain, including regional operator Euskatel.

Vodafone Spain had strong brands and networks, he said, but its low cash flow margin and falling revenue needed to be fixed.

“We have a better plan,” he said, including bringing in former Euskaltel CEO José Miguel García to run the business.

“The revenues are going backwards 1% or 2%. We need to get them going forwards 1% or 2%,” he said.

Zegona’s funding includes €4.2bn in debt led by Deutsche Bank, and €900m from Vodafone in preference shares redeemable no later than six years after closing.

O’Hare will raise equity of up to €600m from Zegona’s shareholders, helping bring debt down to a number beginning with a three and leverage to a number in the twos.

Vodafone, which will receive at least €4.1bn in cash, reversed early gains to trade down 1%. The stock remains near 20-year lows.

Since being named permanent CEO in April, Della Valle has focused on turning around underperforming markets, including announcing 11,000 job cuts in May and the merger of Vodafone’s British unit with CK Hutchison’s Three in June.

AJ Bell investment director Russ Mould said the share price was unmoved on Tuesday even as Della Valle was delivering on her vow to review the group’s structure.

He pointed out that the deal was cash flow dilutive, even if it improved earnings, and it was cash that funded Vodafone’s dividend, where cover was already “fairly skinny”.

Spanish market

Vodafone ranks third in Spanish telecom after Telefonica and Orange. The latter is combining with the fourth-largest player MasMovil.

O’Hare said he was “very excited” to return to the Spanish telecom market.

“This financially attractive acquisition marks our third deal in Spain after successful turnarounds at Telecable and Euskaltel,” he said.

Zegona could wholesale Vodafone’s fixed and mobile networks, he said. “So we will be reaching out and talking with Orange and MasMovil and with Telefonica and finding ways to make sure that the assets that we have are going to be utilised to the max,” he said.

Reuters