Vodafone is set to pocket nearly $2.4 billion from the sale of a controlling stake in its Egyptian business to Saudi Telecom, a move that should help it to slash debts and concentrate on markets it deems more important.
Announced today, the memorandum of understanding for a 55% stake values Vodafone Egypt at $4.35 billion. At about seven times its adjusted earnings (before interest, tax, depreciation and amortization), that is a decent sum for a business that grew service revenues by nearly 15% year-on-year, on a like-for-like basis, for the six months to September 2019.
If the deal goes ahead, Saudi Telecom will continue to use the Vodafone brand, benefiting from "preferential" roaming agreements with the UK-headquartered operator and access to its central procurement function. That will bolster the Saudi incumbent as it looks to expand its presence in the Middle East region.
Not included in the deal are Vodafone's shared service centers, which cater to the company's operations in other parts of the world. Now referred to as "Vodafone Intelligent Solutions," these facilities in Cairo, Giza and Alexandria employ about 7,800 people and Vodafone plans to recruit another 1,000 in the next 12 to 18 months.
"This transaction is consistent with our efforts to simplify the Group to two differentiated, scaled geographic regions -- Europe and sub-Saharan Africa," said Vodafone CEO Nick Read, in explaining the rationale for the deal. "Additionally, it will reduce our net debt and unlock value for our shareholders."
Vodafone's net debt had soared to €48.1 billion ($52.9 billion) in September, from just €27 billion ($29.7 billion) in March, after the company spent €18.5 billion ($20.4 billion) to acquire European cable assets from Liberty Global. Costly investments in new 5G spectrum licenses are also blamed for driving up the figure.
The funds and divestment could provide some much-needed relief for Vodafone, which faces challenges in India and the UK as well as doubts about the sales opportunity associated with new 5G services.
In India, the company has been hit with a $4 billion bill for license fees, interest payments and penalties after the country's top court ruled in favor of the government, which says the money is owed under licensing conditions. Vodafone is now fighting to save a business that has already been hurt by tough competition in India's mobile market.
The company is also under pressure in the UK over its use of Huawei, a controversial Chinese vendor slapped with tough restrictions on its 5G activities after a government decision this week. While Vodafone is less reliant on Huawei than certain other UK operators, it may need to replace some mobile network gear to comply with government limits on the amount of equipment that can be used.
A risk is that other European governments follow the UK example, forcing Vodafone into expensive "swaps" in markets where it is more heavily dependent on Huawei.
The Chinese vendor is regarded as a security threat by critics, who have persistently argued that Chinese government forces could use Huawei's products to spy on other countries or cripple networks.
Like other telcos, Vodafone has pinned its hopes on 5G as a growth story, but the market remains unconvinced that consumers or businesses will spend more on 5G than they do on older network services.
On the London Stock Exchange, Vodafone's share price has dropped 39% since May 2015, when it was at a five-year high of 255.35 pence sterling. Shares were flat after today's announcement, at 156.50 pence sterling.
Vodafone and Saudi Telecom expect to complete a deal by the end of June after a due diligence and the receipt of regulatory approvals.
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— Iain Morris, International Editor, Light Reading