Vodafone Shares Soar as It Values Towers Spin-Off at $20B

Iain Morris
7/26/2019

Vodafone's shares gained 10% during midday trading in London after it unveiled plans to spin off its European towers into a separate company that could be listed or partly sold in the next 18 months.

The UK-headquartered service provider is trying to cut debt and speed up 5G rollout following regulatory approval of its €18.4 billion (US$20.5 billion) takeover of Liberty Global cable assets in Europe.

The towers company, which could be worth more than €18 billion ($20 billion), will have its own dedicated management team looking after about 61,700 towers in 10 European markets and be operational from May 2020. Vodafone expects the company to generate about €1.7 billion ($1.9 billion) in annual sales and €900 million ($1 billion) in earnings (before interest, tax, depreciation and amortization).

The decision follows a strategic review that started last November, when CEO Nick Read first announced plans to set up what he called a "virtual internal tower company" across European operations in a bid to reduce costs.

Vodafone has subsequently announced network-sharing agreements in several major European markets, including Italy, Spain and the UK, and is now in discussions with Deutsche Telekom in Germany about a similar arrangement, Read told analysts on a call today. Deals are also being lined up in smaller European markets.

Finalizing those agreements is a priority for the UK-based service provider so that it can minimize future lease costs before it moves ahead with any divestment plans. "We want to establish those because it is important you reach agreement at a market level first so that when you do monetization you are not locked into an excessively high number of sites," said Read.

The Vodafone boss, who took charge of the business last October, sees three broad options. The first would mean selling stakes in national tower companies to other tower players or financial investors. To do that, Vodafone needs to legally separate the towers from the operating company in each of its European markets -- a process it aims to complete by May 2020.

Number of Vodafone Sites (Tenancy Ratio)
Source: Vodafone.
Source: Vodafone.

As a second step, Vodafone would set up a European holding company for all its European tower assets, including stakes in existing tower companies such as Cornerstone and Inwit, its joint ventures with other service providers in the UK and Italy respectively. In a third step, and as an alternative to an initial public offering of this business, Vodafone could sell a stake in the holding company to a third party.

Read said discussions in the past few months showed there was significant interest in the assets, which he does not feel are "appropriately valued" today. Demand points to an enterprise value of at least 20 times annual EBITDA, he said, implying a valuation of €18 billion ($20 billion) or more for the holding company, based on Vodafone's estimates.

While the arrangements could reduce costs and hold appeal for other service providers deploying costly 5G networks, network-sharing deals and divestment activity will inevitably raise questions about Vodafone's ability to differentiate itself from rivals and retain control of key assets.

Read has ruled out the sale of anything bar a minority stake in the European holding company but says he would be open to bigger disposals at a local level. "It comes down to whether there is a good supply of towers in a market," he said. "Is control a strategic imperative or is there lots of access to towers, in which case we may be open to a majority sale?"

Although Germany's Deutsche Telekom would be the "automatic partner of choice" in that market, Vodafone is also in network-sharing discussions with Telefónica, said Read.

Earlier this week, Vodafone extended its network-sharing deal with Telefónica's O2 business in the UK to cover 5G technology, revealing plans to share "passive" infrastructure as well as some "active" network elements with its rival.

Passive covers the masts and other physical equipment used to host networks, while active refers to the basestations and connectivity systems that are activated to provide services.

Vodafone and O2 also said they had started to explore a potential sale of shares in the Cornerstone business to aid a speedier rollout of 5G services.

Any proceeds from divestment activity will help Vodafone to reduce group debts, which could spiral to between 3.2 and 3.5 times annual earnings, according to ratings agency Standard & Poor's, after the Liberty Global takeover.

Service providers including Deutsche Telekom, Telecom Italia and Telefónica are also under pressure to reduce debts that have risen because of takeover activity and spending on new 5G licenses.

Path to growth
In a trading update that accompanied the towers announcement, Vodafone today reported a 2.3% year-on-year dip in revenues for its June-ending quarter, to about €10.7 billion ($11.9 billion), with service revenues down 0.2%, to roughly €9 billion ($10 billion).

That marked an improvement on the 0.7% decline it saw in the preceding quarter and Read continues to guide for "low single digit organic growth" in earnings (in percentage terms) for this full year.

He is confident that new pricing plans -- offering unlimited data usage for a fee based on the connection speed -- will boost average revenue per user (ARPU) in markets where they are available.

In Spain, about half a million existing customers have now switched to unlimited tariffs and ARPU in that group is up €3 ($3.30) a month, according to Read. Vodafone serves about 13.5 million mobile customers in Spain and has seen overall monthly ARPU fall to about €14.80 ($16.50) in the recent quarter from €16 ($17.80) a year earlier.


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Despite the company's optimism, several analysts sound worried that Vodafone is not charging a premium for its unlimited 5G plans in the UK, warning of the long-term risk to profitability.

The unlimited move was today copied by Three, the smallest of the country's network operators, fueling concern about the levels of competition in the nascent 5G market. "The attractive pricing trend for 5G is a boon for consumers, but it is looking increasingly challenging for operators to make a significant return on the huge investment required," said Kester Mann, the consumer and connectivity director for analyst firm CCS Insight, in emailed comments. "This is worrying for an industry seeking new opportunities to reinvigorate the top line."

Read also delivered a warning to Deutsche Telekom that he plans a swift upgrade of Unitymedia's cable network, following Vodafone's just-approved takeover of Liberty Global assets. "We will be able to market gigabit broadband to 25 million homes by the end of 2022 compared with national FTTH [fiber-to-the-home] coverage that we estimate will be 8 million given Deutsche Telekom's target of adding 2 million homes per year," he said.

Deutsche Telekom's retail share of Germany's broadband market has already fallen from 42.6% to 39.5% in the past five years, according to its own data.

Trading at around 145.8 pence sterling at midday, Vodafone's share price has fallen from 177.1 this time last year.

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— Iain Morris, International Editor, Light Reading

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James_B_Crawshaw
James_B_Crawshaw
7/26/2019 | 4:03:07 PM
Financial engineering
Selling cell towers and then leasing them back is a rather unimaginative form of financial engineering. But Vodafone equity investors seem to like it so what do I know? Perhaps they could sell all their sell all their offices next. Do an IPO of the stationary cupboard. And merge their canteen with Sodexo. Doing deals is so much more fun than trying to sell telecom services.